Investment Guide for China CMM/CBM

# Preface

China is a big coal producing country in the world. CBM is a
non-conventional natural gas associated with coal. Based on the latest
statistics, the national CBM resources at a depth above 2,000m are 310
trillion m^3^, which are equivalent to resources of the conventional
natural gas. CBM is one of the clean energy resources. Development and
utilization of CBM may improve energy supply, mine safety and global
environmental protection.

Underground CBM drainage and surface development has made a great
progress in this country. Since 50's in 20^th^ century, underground gas
drainage technology has been applied in China and the quantity of gas
drained has been rising year by year. By the end of 2002, 193 mines in
China carried out gas drainage, the total quantity of gas drained
reaching 1.146billion m^3^.

Currently, China has possessed good basic conditions for international
cooperation in development of CBM in China. Since early 90's in the
20^th^ century China has attached importance to development of CBM by
surface wells. Up to now, China has drilled 210 wells for various
purposes. 79 out of over 200 wells prospected have been jointly
developed with foreign countries. China has signed consecutively eleven
Production Sharing Contracts (PSC) with six foreign companies, including
Texaco, Phillips, Virgin, Greka, Lowell, etc., covering a total area
over 20,000km^2^. The data of proven CBM reserves issued recently have
indicated that there is a broad prospect for CBM industry in China. For
example, the workable reserves of CBM in south of Qinshui Basin in
Shanxi reach 21.8 billion m^3^, which have laid good foundation for
development of CBM industry.

As compared with developed countries, there is a big gap in development
and utilization of CBM in China. For example, USA developed tremendously
CBM in early 80's in the 20^th^ century. CBM production reached 38.3
billion m^3^ in 2000. The total quantity of CBM drained underground was
1.13 billion m^3^ in 2001 in US. The utilization rate of drained CBM
reached 80%.

Introduction of advanced technologies and foreign funds from developed
countries is favorable to development of CBM industry in China. At the
same time, the government has formulated a series of preferential
policies to encourage development of CBM in China. CBM projects entered
the list of "Directory of key industries, products and technologies
encouraged by the state" " Directory of industries for foreign
investors". Projects within the directories will enjoy a number of
preferential terms.

While CBM is developed vigorously in China, the size of CBM utilization
grows increasingly and has obtained remarkable success. The CBM-fired
120Mw power generation plant developed by Jincheng Coal Group in Shanxi
Province will be the largest in the world. The construction of this
power plant has led a number of coal enterprises in this country to
develop actively the CBM power plant projects. For example, Fuxin Mining
Group Ltd Co. in Liaoning and Shuicheng Mining Group Ltd Co. in Guizhou
have set up CBM power plants within a short period.

The aim of this guidebook is to describe CBM resources and the state of
art in China, the preferential policies, market analyses, modes of
international cooperation, etc. for development of CBM resources in
China. The purpose is to let the foreign investors understand the great
market potential for development of CBM in China, and their investment
in CBM industry may be repaid. Compilation of the guidebook is one of
the contents of a cooperative project between CCII and USEPA, entitled
"Commercialization of CBM/CMM ". In the Third International Workshop of
CBM/CMM Utilization, co-sponsored by US Environmental Protection Agency
and China Coal Industry Association in 2002, the editors solicited
opinions of the participants on outline of the guidebook and
requirements to the authors. Many experts put forward some constructive
suggestions, which played an active role in perfection of the contents
of the guidebook. The editors should like to express thanks to experts
and scholars at home and abroad. Mr. Karl Schultz, the former Director,
Mr. Clark Talkington, the current Director of CBM Center of USEPA, and
Mr. Mr. Ray Pilcher, President of Raven Ridge Resources Company, checked
and proved carefully the English issue and made suggestions on
amendments and made great efforts on this guidebook. We would like to
extend heartfelt thanks to them. China United Coalbed Methane Co. Ltd
contributed to accomplishment of this book, and we would like to thank
them too. There is not doubt that this guidebook has shortcomings, and
we hope that the readers may make comments.

China Coalbed Methane Clearinghouse

April 2004

**CONTENTS**

[PART 1 OVERVIEW ON CHINA CMM/CBM INDUSTRY
1](#part-1-overview-on-china-cmmcbm-industry)

[Chapter 1 CMM/CBM Resources in China
1](#chapter-1-cmmcbm-resources-in-china)

[1.1 Energy Production and Use in China
1](#energy-production-and-use-in-china)

[1.2 Coal and Coalbed Methane Resources
1](#coal-and-coalbed-methane-resources)

[1.3 China's Approach to Developing These Resources
2](#chinas-approach-to-developing-these-resources)

[1.4 Distribution of Coalbed Methane Resources
3](#distribution-of-coalbed-methane-resources)

[1.5 The Technologies of CMM/CBM Recovery
3](#the-technologies-of-cmmcbm-recovery)

[1.6 Abundant CMM Resources in Abandoned Mines
6](#abundant-cmm-resources-in-abandoned-mines)

[1.7 CMM in Working Coal Districts 7](#cmm-in-working-coal-districts)

[1.8 CMM Extraction from Coal Mines in China, to Date
8](#cmm-extraction-from-coal-mines-in-china-to-date)

[1.9 CBM Surface Recovery 9](#cbm-surface-recovery)

[Chapter 2 CMM Utilization and Transportation
11](#chapter-2-cmm-utilization-and-transportation)

[2.1 CMM Utilization in China 11](#cmm-utilization-in-china)

[2.2 CMM/CBM Use in Coal Districts 11](#cmmcbm-use-in-coal-districts)

[2.3 Transporting CMM 12](#transporting-cmm)

[Chapter 3 The Market for Gas 15](#chapter-3-the-market-for-gas)

[3.1 The Gas Market 15](#the-gas-market)

[3.2 Forecast for the Natural Gas Market in China
15](#forecast-for-the-natural-gas-market-in-china)

[3.3 China's Power Sector 16](#chinas-power-sector)

[3.4 The Market for Electricity Generation in China
16](#the-market-for-electricity-generation-in-china)

[PART 2 THE INVESTMENT AND DEVELOPMENT CLIMATE
18](#part-2-the-investment-and-development-climate)

[Chapter 4 Economic Development Climate in China
18](#chapter-4-economic-development-climate-in-china)

[4.1 Summary 18](#summary)

[4.2 Development of Coalbed Methane Resources Calls for Participation of
More Investors and Foreign Investments
18](#development-of-coalbed-methane-resources-calls-for-participation-of-more-investors-and-foreign-investments)

[4.3 Incentives for International Investors
19](#incentives-for-international-investors)

[4.4 The Impact of Greenhouse Gas Emission Reduction Initiatives
19](#the-impact-of-greenhouse-gas-emission-reduction-initiatives)

[Chapter 5 Preferential Finance and Tax Policies for CMM/CBM Projects
21](#chapter-5-preferential-finance-and-tax-policies-for-cmmcbm-projects)

[5.1 Policies Encouraging CMM/CBM Development in China
21](#policies-encouraging-cmmcbm-development-in-china)

[5.2 Current Taxation Policies for CBM Exploration and Development
Projects
23](#current-taxation-policies-for-cbm-exploration-and-development-projects)

[5.3 International Cooperative Experience of CBM Projects in China
27](#international-cooperative-experience-of-cbm-projects-in-china)

[5.4 Obstacles to Project Development
28](#obstacles-to-project-development)

[Chapter 6 Financing CMM 29](#chapter-6-financing-cmm)

[6.1 International Financial Institutions and Lending Programs
29](#international-financial-institutions-and-lending-programs)

[6.2 Environmental Protection Related Funds
30](#environmental-protection-related-funds)

[PART 3 STEP BY STEP: DEVELOPING 35](#part-3-step-by-step-developing)

[A PROJECT 35](#a-project)

[Chapter 7 Procedures for Planning, Approval, and Implementation of
Coalbed Methane Projects
35](#chapter-7-procedures-for-planning-approval-and-implementation-of-coalbed-methane-projects)

[7.1 History of International Partnerships Formed for CMM/CBM
Development
35](#history-of-international-partnerships-formed-for-cmmcbm-development)

[7.2 China United Coalbed Methane Company Limited (CUCBM)
35](#china-united-coalbed-methane-company-limited-cucbm)

[7.3 Types of Foreign Cooperation for CMM/CBM Exploration/Development
Projects
36](#types-of-foreign-cooperation-for-cmmcbm-explorationdevelopment-projects)

[7.4 Coalbed versus Coal Mine Methane Projects
37](#coalbed-versus-coal-mine-methane-projects)

[7.5 CMM Development Projects 38](#cmm-development-projects)

[7.6 CBM Development Projects 39](#cbm-development-projects)

[Chapter 8 Laws and Regulations Applicable to the Development of CMM/CBM
Resources
42](#chapter-8-laws-and-regulations-applicable-to-the-development-of-cmmcbm-resources)

[Chapter 9 Contracts for CMM/CBM International Cooperation
44](#chapter-9-contracts-for-cmmcbm-international-cooperation)

[9.1 Summary 44](#summary-1)

[9.2 Foreign Cooperation Policies 44](#foreign-cooperation-policies)

[9.3 Standard Contracts for CBM International Cooperation
45](#standard-contracts-for-cbm-international-cooperation)

[9.4 Current Active Standard Contracts
47](#current-active-standard-contracts)

[9.5 Preferable Model for Coal Mine Methane (CMM) International
Cooperation
47](#preferable-model-for-coal-mine-methane-cmm-international-cooperation)

[PART 4 USEFUL REFERENCE INFORMATION
49](#part-4-useful-reference-information)

[Key Contacts in China CMM/CBM Development
49](#key-contacts-in-china-cmmcbm-development)

[Organizations and Institutions Involved in CBM Development, R&D, and
Consultation
49](#organizations-and-institutions-involved-in-cbm-development-rd-and-consultation)

[Construction Entities 51](#construction-entities)

[Institutions for Testing, Lab Tests, and CBM Reservoir Simulation
51](#institutions-for-testing-lab-tests-and-cbm-reservoir-simulation)

[Appendix 1 Regulations for Registering to Explore for Mineral Resources
Using the Block System
53](#appendix-1-regulations-for-registering-to-explore-for-mineral-resources-using-the-block-system)

[Appendix 2 The List of Minerals That Fall Under the Jurisdiction of the
Department in Charge of Geology and Mineral Resources Under the State
Council
61](#appendix-2-the-list-of-minerals-that-fall-under-the-jurisdiction-of-the-department-in-charge-of-geology-and-mineral-resources-under-the-state-council)

[Appendix 3 Regulations for Registering to Mine Mineral Resources
62](#appendix-3-regulations-for-registering-to-mine-mineral-resources)

[Appendix 4 Regulations for Transferring Exploration Rights and Mining
Rights
69](#appendix-4-regulations-for-transferring-exploration-rights-and-mining-rights)

**Acknowledgements**

**List of Tables**

**Table 1-1** Important Coal-bearing Regions and Associated CBM
Resources

**Table 5-1** Summary of Preferential Finance Policies for CBM Projects

**Table 5-2** Summary of Preferential Finance Policies for CMM Projects

**Table 9-1** Royalty Rates for CBM Cooperation Projects in Three
Provinces and Regions of Qinghai, Xizang, Xinjiang, and Shallow Sea
Region

**Table 9-2** Royalty Rates for CBM Cooperation Projects in Other
Provinces, Autonomous Regions, and Cities

**Table 9-3** International Cooperation Projects with CUCBM

**List of Figures**

**Figure 1-1** Distribution of CBM Resources in China's Coal Mine Areas

**Figure 1-2** Distribution of High-Quality CBM Resources in China

**Figure 1-3** The Schematics Diagram of Drainage Methods

**Figure 1-4**. The Distribution of Abandoned Coal Mines in China

**Figure 1-5** Volume of CMM Extracted from Coal Mines Over the Past
Years

**Figure 2-1** The Distribution of Natural Gas Pipelines in China

**Figure 3-1** Installed Capacity of Electrical Power Generating Plants,
by Type

**Figure 7-1** The Approval Procedure for CBM Project

#  {#section .chapter-head}

**How to Use this Book**

This *Investment Guide* is an essential tool for anyone interested in
pursuing CMM or CBM projects in China. It contains a description of CMM
and CBM resources; discusses financing CMM/CBM projects in China; offers
comprehensive information on policy, regulations, and laws; and leads
the reader through the steps that must be taken to develop CMM projects
in China.

Part 1 introduces the potential investor to coal methane resources in
China. It describes CMM/CBM resources, their use and transport in China,
and the markets for these resources.

Part 2 discusses the development climate in China that the investor can
expect to encounter. Investor incentives, global pressures to develop
coalbed methane resources, preferential finance and tax policies on the
part of the Chinese government, and methods of financing development
projects are described. A *Project Calls for Investment* is presented.

Part 3 leads the investor step by step through the processes and
procedures for a successful CMM/CBM project in China. It describes the
relevant Chinese management agencies and presents models for
international cooperative ventures. Contracts are discussed and
applicable regulations and laws are presented.

Part 4 of the Guide contains useful reference information, including a
contact list of institutions and organizations in China related to this
industry. Appendices present the translated complete text of relevant
Chinese laws and regulations.

# PART 1 OVERVIEW ON CHINA CMM/CBM INDUSTRY

## Chapter 1 CMM/CBM Resources in China

### 1.1 Energy Production and Use in China

China produces and also consumes a large amount of energy. Coal is the
primary source of energy in China and in the past ten years, it has
supplied 70 percent of the total energy usage in the country. In 1990,
total energy consumption was 1220 million tons of coal, which is 10
percent of the total energy consumption in the world, and ranks China as
the second largest energy consumer worldwide.

Since 1990, and especially since 1995, with the promotion of the free
market economy in China and with increasing environmental concerns, the
growth of oil, gas, and electric power has greatly exceeded that of coal
and biomass energy, and the growth of natural gas has especially
increased. According to data from the State Statistical Bureau, the
output of natural gas in China has increased from 20 billion m^3^ in
1996 to 27.7 billion m^3^ in 2000, with an average annual growth rate of
9.5%. The percentage of natural gas consumption increased from 1.8% in
1996 to 2.6% in 1999. China also began importing energy supplies in 1993
and the amount has been increasing each year. In 2000, 4.8 million tons
of liquid natural gas were imported.

The energy consumption structure in the country is not optimal. In 1999,
coal supplied 68% of China\'s total energy needs, petroleum 23%, and
natural gas consumption represented 2.6% of the total energy
consumption. The proportion of natural gas consumption was far less than
the average level of 24% for other countries. In order to achieve the
sustainable development of energy sources and improve the environment,
China must give priority to high-quality energy sources, adjust the
energy structure, and increase the proportion of natural gas as a
primary source of energy. Energy development planning projections
indicate that by 2010, the proportion of natural gas consumption will
increase from less than 3% to 10%.

### 1.2 Coal and Coalbed Methane Resources

China has an abundance of coal resources and is also rich in coalbed
methane. The estimated coalbed methane resources to the depth of 2000 m
below the surface are 30 -- 35 trillion m^3^ ( A Handbook of Coalbed
Methane Development and Utilization). Coalbed methane is not only a
clean energy source but also a potent greenhouse gas. Development and
utilization of coalbed methane can increase the energy supply, improve
coal mine safety, and protect the global environment.

China is the largest coal producer in the world, and the country is the
biggest mine methane emission country in the world due to coal mining.
Approximately 8 -- 10 billion m^3^ of mine methane is vented into the
atmosphere each year (Methane Category GHG Emission in China's Coal Seam
and its Inventory Drawing/Zhen Shuang/ China Coal/ 2002. 28 (5)).
Therefore, China is eager to strengthen coalbed methane recovery and
utilization and to further develop the coalbed methane market in coal
mining areas.

By the year 2000, underground gas drainage systems had been established
in 184 coal mines in China, with annual mine methane recovery of up to
858 million m^3^. In recent years, progress has been made in surface
coalbed methane development. One hundred ninty-three coalbed methane
wells had been drilled throughout the country as of the year 2000.
However, due to the shortage of methane utilization facilities in China,
coal mine methane utilization was less than 500 million m^3^. The
Chinese government attaches importance to coalbed methane development
and utilization and includes the development of coalbed methane in
China's *Tenth Five Year Energy Development Plan* (2001 -- 2005).

### 1.3 China's Approach to Developing These Resources

When China began to use CMM/CBM in the 1950s, the primary goal was to
improve the standard of living of residents who lived in coal districts.
The work was heavily subsidized, so many coal-mining companies were not
eager to develop CMM/CBM utilization projects. In the last few years,
with the increase in environmental protection awareness throughout the
world, the government has adjusted the price of natural gas from under
0.12 US\$ to near 0.22 US\$ Yuan. More people have recognized CMM/CBM as
a clean energy source, and the coal-mining industry is paying attention
to the use of CMM/CBM. Furthermore, many mining districts are located in
the middle and eastern parts of China and some are near to large or
medium-sized cities where industries are developed and there is a
shortage of clean energy. Given the proximity to large population areas
and the need for a clean-burning fuel, CMM/CBM production will enjoy a
robust market.

Environmental and social reasons to develop coal methane resources are
as important as the economic benefits. The government of China has
created a number of incentives for foreign investors to participate in
the development of CMM and CBM. A major use of methane is electric power
generation, and China seeks a variety of international investment
programs for the power generation market. It has established policies
and incentives to attract international capital for the construction of
new power generation plants. In addition to direct investments by
international businesses, a variety of other techniques are being used
to bring capital funds to China, including:

-   Direct financing of the international capital market,

-   Loans from international financial institutions and governments,

-   Build-Operate-Transfer funds, and

-   International trade and technical cooperatives.

The World Trade Organization (WTO) also helps to provide additional
channels for foreign capital to come into China\'s power generation
market.

As a result of the worldwide attention paid to the global environment,
the environmental benefit of coalbed methane projects is being
recognized. Multiple channels of financing for coalbed methane projects
are of crucial importance to the development of the coalbed methane
sector as an emerging industry. In their commitment to the development
of the coalbed methane industry, many international organizations and
institutions such as the United Nations and the Global Environmental
Facility (GEF) have all provided coalbed methane projects with financial
support and technical assistance. The United Nation's CDM (Clean
Development Mechanism), for example, is a new financing channel for
coalbed methane project development, since CBM is an environmentally
friendly form of energy development. Coalbed methane project developers
and investors can take advantage of the lending policies and
environmental and development goals of various institutions for coalbed
methane project support. These are discussed in more detail in Chapter
6, *Financing CMM.*

In recent years, China has attached much importance to safe coal
production and is steadily increasing its supervision and management
efforts. Moreover, China formed the State Administration of Coal Mine
Safety Supervision, which is in charge of safety supervision and
management of national coal mines and carries out administrative
responsibilities concerning coal mine safety and accidents. Every coal
mine company has set up a coal mine safety supervision bureau managed
directly by the State Administration. For example, several gassy mines
are planned or are being built concurrently with new or refurbished gas
drainage facilities resulting in major development of CMM/CBM over the
next ten years. By 2010, the estimated CMM/CBM quantity produced
annually in China will amount to 1.5 billion m^3^.

### 1.4 Distribution of Coalbed Methane Resources

China has many basins where commercially producible coal resources occur
of these, there are thirteen major coal-bearing areas where large
CMM/CBM resources are concentrated. The amount and distribution of CBM
reserves in these coal basins are shown in Figure 1-1 and Figure 1-2.
Figure 1-1 shows coalbed methane resources in coal mining areas in
China. Figure 1-2 shows the distribution of basins where highly
favorable geologic conditions exist for the potential commercial
production of CBM. According to the study of China Coal Geologic
Administration, the most favorable CBM resources are found in central,
eastern, western, southwestern, northwestern and southeastern portions
of China*.*

Ten coal regions (excluding the Zhunger, Tulufan, and Yili basins)
contain a large number of mines that CMM/CBM reserves account for 68% of
China's total reserves. Annual quantities of extraction in both the
Fushun and Yangquan coal mining areas exceed 100 million m^3^, and the
extraction quantities of CMM/CBM in Jincheng, Huainan, and Panjiang are
increasing rapidly.

According to \"The Resource Evaluation of National Coalbed Methane\"
(March, 2000), the total amount of CBM resources contained in bituminous
coal and anthracite coal deposits at depths between 300 and 2000 m is
31.46 trillion m^3^. Coalbed methane resources of China are
approximately equivalent to the total amount of conventional natural gas
resources, which are estimated to be 30 trillion m^3^.The majority of
CBM resources, 68.5%, are found in eastern China, whereas the natural
gas resources are located in offshore and the far western sedimentary
basins.

In 115 CBM target areas from which data are available, the average gas
content is 9.76 m^3^/ton, the concentration of methane is 90.6%, the
average of resources density is 115 million m^3^/km2, and the average
saturation is 41%.

### 1.5 The Technologies of CMM/CBM Recovery

Methane is removed from coal mines through *surface* and *underground*
extraction. *Underground extraction* is the primary technique in use
today. *Surface extraction* technology includes the surface standard
well and surface gob (old workings) well. CMM can be extracted from coal
seams, neighboring seams, and by extracting the methane in a more
comprehensive way from all strata.

CMM extraction from nearby seams is the technique most widely used, and
may be relatively efficient. Following this method, the boreholes are
drilled into neighboring seam from drilling galleries that are placed in
the return airways of the seam that is being extracted. Relaxation of
the neighboring strata caused the permeability of the reservoir rocks to
increase and the gas is captured from the boreholes and pumped to the
surface.

There are many approaches to developing CBM reserves; but two have
presented viable alternatives for developing reserves in China. One is
to drill for CBM in non-coal mine areas, this activity is equivalent to
exploring for natural gas; the other is to drill for CBM in producing
and abandoned coal mine areas. Wells are commonly drilled to depths
between 500 and 1000 m, and the average cost per well is 2- 3 million
Yuan, which is more expensive than surface gob wells, generally costing
between 0.8 to 1 million Yuan.

![](media/image1.jpeg){width="5.291666666666667in"
height="3.4770833333333333in"}Figure 1-1 Distribution of CBM Resources
in China's Coal Mine Areas

![](media/image2.jpeg){width="5.565972222222222in"
height="3.842361111111111in"}

**Figure 1-2 Distribution of High-Quality CBM Resources in China**

![](media/image3.png){width="1.8555555555555556in"
height="1.4423611111111112in"}Fig 1-3 The Schematic Diagram of Drainage
Methods

### 1.6 Abundant CMM Resources in Abandoned Mines

Although there are abundant coal resources in China, with reserve
depletion, a large number of mines have closed or will close in the near
future. By the end of 1999, there were 459 abandoned coal mines
(important state-owned mines) and over 30 billion tons of coal reserves
abandoned in old coal mines and production mines, and hundreds of
billions m³ retained gases. There are abundant gas reserves in these
mines, extensive information about them is available, and benign well
bore and downhole engineering exists. These are attractive locations for
coal mine methane projects and reserve exploitation.

The drainage and utilization of abandoned coal mine gas is a new
industry gaining momentum in Europe and America in recent years. It can
reduce safety risks, increase clean energy sources, and protect the
environment. More and more countries are recognizing its value.

The majority of abandoned coal mines are located in high gas coal
districts, and these are the more worthy targets. Not only are there
abundant reserves but also a large number of mines have set up
underground drainage systems and surface gas transportation systems.
This can not only ensure dependable gas provisions but also greatly
reduce the initial investment.

Coal methane projects in abandoned coal mines have significant
advantages over surface exploration and projects conducted in active
mining conditions.

First, coalbed permeability is improved by large-scale exploitation.
Coal cuttings produce stress and fractures in the rock. Adjacent beds
(coal beds included) in the goaf (the old workings) are
depressurized**,** the fissure is enlarged, and permeability improves
greatly. After mines are abandoned, the goafs in old work areas and
adjacent broken rocks form a tremendous subsurface gas reserve. Under
the condition of negative pressure, methane in the subsurface reserves
bed can be analyzed easily and can get through the fissure and other
channels into goafs and rejected well bores.

Second, mine methane drainage projects in abandoned coal mines can take
advantage of existing underground engineering and original drainage
facilities without more surface bore holes. Typically, engineers seal
only the pithead and other channels that connect with the surface. So,
the initial investment and the draining cost are relatively low.

Of equal or greater importance, the type of project that takes place in
abandoned coal mines isn't subjected to the impact of coal exploration
and other industrial activities. Mining activities will take precedence
over methane extraction, so that this type of single project, where gas
drainage and not mining is the primary activity, affords the operator
greater control and economy of activity.

The Chinese Coal Information Institute (CCII) has carried out the
evaluation of AMM reserves in abandoned coal mines. On the basis of
this, we determined under the present economic conditions that ten
important coal mining districts offer the highest potential for AMM
reserves exploitation. They are Tongchuan, Fushuan, Fengcheng, Yongrong,
Tianfu, Nantong, Yangquan, Shuichen, Hegang, and Jixi.

Xi'an Branch of China Coal Research Institute and CCII have cooperated
to develop an Abandoned Coal Mine Methane Utilization project in
Tongchuan Coal Mine Group in Shaanxi province.

Figure 1-4 shows the distribution of abandoned coal mines in China. The
black dots represent the location of abandoned mines.

![](media/image6.jpeg){width="5.497222222222222in"
height="3.9159722222222224in"}

Figure 1-4 The Distribution of Abandoned Coal Mines in China

### 1.7 CMM in Working Coal Districts

China began underground drainage of CMM earlier than many other
countries, and technologies have advanced greatly. Chinese mines have
formed integrated underground gas drainage systems that are suitable for
all kinds of geological conditions. However, because draining CMM in
coal districts is primarily focused on increasing coal production and
ensuring the safety of coal miners, the total drainage efficiency is
low, about 23 percent at present. According to the experiences of mining
companies, as long as CMM can be fully utilized and drainage can be
increased, the drainage rate could reach 50 percent using existing
technology and equipment.

Considering the direction of development in the CMM/CBM industry,
large-scale CBM commercialization will eventually take place in
undeveloped coal fields. But at present most CMM/CBM exploration and
development in China should first be done in coal districts. *There are
three main reasons for this.*

#### 1.7.1 CMM/CBM market in coal districts can be guaranteed. 

A majority of coal districts are situated in the middle and east of
China where industries are well established. Many coal districts
themselves are small or mid-sized cities that house the mine workers and
support industry workers. Often, the coal mines are near large
commercially advanced cities, ensuring the need for energy and healthy
market for CMM/CBM. Further, many mine districts have set up local
CMM/CBM transportation systems and have substantial experience.

#### 1.7.2 Coal districts in general have been meticulously investigated. 

There is a high degree of exploration and there are a large number of
coal mines. Sophisticated CMM/CBM exploitation technologies have been
developed since 1950. Drainage has reached more than 860 million m^3^ by
2002. Reserve conditions, gas content, permeability, and gas absorption
and adsorption stripping are known. So initial investments are small and
the risk will be reduced accordingly.

#### 1.7.3 CMM projects in coal districts enjoy special preferential policies. 

These governmental special preferential policies are in addition to
those that are suited to general CMM/CBM projects. In China, draining
underground CMM belongs to comprehensive utilization of waste material,
which may enjoy income tax preference policy and up to five years'
income tax immunity after putting into production.

The China Coalbed Methane Clearinghouse, established more than eight
years ago, is devoted to promoting CMM/CBM development in Chinese coal
districts. In 1999, it started "the CMM market development in coal
districts project," a follow-up project sponsored by the U.S.
Environmental Protection Agency (EPA). Various mine districts of China
have been comprehensively investigated with regard to reserves,
drainage, and utilization. On the basis of this, the studies undertaken
show that the Jincheng, Huainan, Fushuan, Tiefa, Panjiang, and
Pingdingshan mine districts are good prospects for CMM/CBM development.

### 1.8 CMM Extraction from Coal Mines in China, to Date

CMM extraction from working mines in China began in the 1950s. After
initial testing at the Longfeng coal mine by the Fushun Mine Bureau, CMM
extraction was implemented in high-gas coal mines.

Presently 184 out of 621 coal gassy coal mines use CMM drainage systems
extracting 860 million m^3^/a. In 1996, of these 621 state-owned coal
mines, there were 296 mines, or 48%, at which CMM was being vented to
the atmosphere. The amount of gas ventilation reached 1,146 m^3^/min in
2002, or 85.4% of the total liberated amount. The yearly amounts of CMM
extracted in the past are shown in Figure 1-5.

![](media/image7.wmf)Figure 1-5 Volume of CMM Extracted from Coal Mines
Over the Past Years

### 1.9 CBM Surface Recovery

Since the 1990s, China has been testing and improving CBM surface
recovery technology. As of the end of 2000, China had constructed more
than two hundred kinds of surface wells, of which more than 80 percent
are located in coal districts. In Chinese coal districts, the
exploitation of CMM/CBM has many advantages, such as the existence of
large reserves, basic facilities in place, and access to technologies
and markets. Surface CBM exploitation in coal districts has achieved
tremendous progress. In Jincheng, Tiefa, and Fushun, CMM/CBM
exploitation projects indicate prospective commercialization. The daily
production of some CMM/CBM wells reached 7000 to 10,000 m^3^ per day.

By the end of 2001, more than two hundred extraction wells had been
completed. Thirty of these wells had a production rate of 2,000 m^3^/d.
These high-production wells were concentrated in mines located the
Hedong and Bishui coalfields.

China has been testing and extending surface CBM recovery technology
since the 1990s. Surface CBM drainage has achieved rapid progress, but
there is still no decisive progress in large-scale commercial
development. *There are three primary reasons:*

#### 1.9.1 Infrastructure for gas utilization is lacking. 

American surface CBM exploitation has gained great success, largely
because they have established excellent gas pipeline networks. In recent
years, China has paid much attention to the construction of gas
pipelines, and the network is increasing. As a whole, a majority of
natural gas pipelines from gas fields have connected with users, but
natural gas piping systems across provinces haven't been established. At
the same time, the undeveloped fields are far away from large cities and
residential complexes, and available pipelines do not exist. (See
chapter 2, CMM utilization and Transportation, for more on this.)
Therefore, markets cannot be guaranteed for coal mine gas that is
distant from producing gas fields.

#### 1.9.2 The degree of exploration in a majority of undeveloped fields is low.

Only cursory investigations have been carried out. Moreover, in the
course of former exploration, the parameters of CBM were hardly tested.
Even if the data tested were provided, the degree of accuracy is
difficult to guarantee because of poor CBM technology at the time.
Therefore, during the initial stages of untargeted CBM exploration, the
volume of effort devoted was very large and the risk was relatively
large.

#### 1.9.3 Surface well technology in China must consider its unique reservoir conditions. 

Studies on the conditions of coalbed reservoirs show that in China,
although many coalbed reservoirs contain high amounts of gases,
reservoir pressure and permeability are low. Therefore, the gas
production rate after well completion using general methods is low, and
the effects of yield increase are not obvious using American
well-rounded compressive fracture methods. More than two hundred surface
CBM wells have been drilled to date, but fewer than thirty are high
yield and dependable. Therefore, to exploit surface CBM, key problems
must be tackled to develop a surface CBM exploitation technology system
suitable for China's geological conditions.

While China has begun to implement incentives for exploration and
exploitation of CMM/CBM, more are needed in order to compete in direct
economic benefits with natural gas. CMM/CBM exploitation deserves
preferential economic policies more urgently than conventional natural
gas because a lot of social and environmental benefits will be gotten
from CMM/CBM development.

## Chapter 2 CMM Utilization and Transportation

### 2.1 CMM Utilization in China

The first usage of CMM in China was in 1952 when the Fushun Mine Bureau
built a carbon black plant that used CMM as the raw material. In 1982,
the Chinese government began investing in CMM power generation projects
for energy conservation.

CMM is also used for industrial boiler fuel and chemical production. The
best way to utilize the CMM/CBM depends on the situation of the project
site location. At the present time, 70% of the CMM produced from the
Fushun and Yangquan mines is used for residential heating and cooking as
well as for educational facilities.

In 1990, the Fushun Mine Bureau built the first demonstration CMM fueled
power plant in China with a capacity of 1,500kW.

> *In 1995, Jincheng Anthracite Mining Group used seven CBM wells to
> fuel a 4×400kW power plant. The company increased the capacity by
> 2×2,000kW in early 2002 by building a second CMM power plant. The
> annual production of CMM for the power plants is 23.5 million m^3^. A
> third CMM power plant with a 120MW capacity is also planned.*

In 1982, China formally added CMM utilization into its national
investment plans of capital construction of energy conservation. Thus
far there have been more than 60 utilization projects. In 2000,
utilization of CMM reached about 0.5 billion m^3^. This is mainly from
underground drainage systems. Surface-well CBM exploitation is in the
experimental stage and has not progressed to commercial production.

Urban coal gas provisions in Yangquan, Fushun, Jiaozuo, and other cities
mainly depend on CMM recovered from local mines. There are three mine
areas where electric-generation projects using CMM/ have been set up.

### 2.2 CMM/CBM Use in Coal Districts

#### 2.2.1 Household fuel

Recovered CMM from underground drainage is middle heating value fuel gas
with a concentration of methane generally from 30% to 50%. In China,
this kind of CMM mainly is used as household fuel and industrial boiler
fuel. A small percentage of this product is used to generate electricity
and produce chemical products.

CMM can be directly used for residents living in the mine area and by
restaurants, hospitals, and schools. But because the number of users in
mining districts is small, large-scale utilization must depend on
cities. Now, urban fuel includes coking gas, liquefied gas, and natural
gas, which respectively account for 23%, 63%, and 13% of total
consumption. The heat value of underground drained CMM is equal to coke
gas. So if the city takes coke gas as fuel gas, CMM can be directly used
as urban fuel. Otherwise, gas supply pipelines and fuel gas cooking
utensils need to be great changed.

Household use has always been the primary use since China started
producing CMM/CBM. Now household use represents more than 90 percent of
the total quantity of methane used. Huainan and Tiefa are preparing
CMM/CBM household utilization projects.

> *The Huainan mine district is an important coal production base in
> China. There are now 11 active mines having an aggregate production
> capacity of 19 million tons per annum. There are abundant CMM/CBM
> reserves and the total quantity of reserves has reached 592.8 billion
> m³, of which the quantity of CMM/CBM reserves below 1000m can reach
> 140 billion m³. The Huainan mine district is a high gas coal field. In
> order to safeguard production at the coal mines, seven underground
> drainage systems have been established. In 2001, the quantity of
> CMM/CBM has reached 74 million m³. It reached 100 million m³ in 2002.
> However, the utilization quantity now is less than 10 million m³. The
> remaining gases have are vented to the atmosphere. Huainan city lies
> in the boundary of Huainan mine district, which has a an urban coal
> gas utilization base. There are seven gas storage tanks and more than
> 200 km of transportation pipeline. This city now takes the mixture of
> liquefied gas and air as residential and commercial fuel. The gas
> price is 1.80 yuan/m³ based on the heating value. The city government
> is highly supportive of changing to CMM/CBM. Huainan mining group
> company is ready to build a CMM/CBM household usage project.*
>
> *Total investment for this project is 1776 billion yuan. The annual
> gas quantity can reach 74,000 m³. The gas price will be 1.10
> yuan/m³,determined as a function of heating value.. Preliminary
> estimates show that the internal rate of return (IRR) of the project
> is 20 percent and the payback period is seven years. At present, China
> has provided Huainan mining group with 18 million yuan in low-interest
> national loans that can be used to reconstruct underground drainage
> systems and build surface CBM utilization facilities. Most portions of
> the project investment will invite foreign companies to invest capital
> besides using a part of national debt loans.*

#### 2.2.2 Electricity Generation 

CMM/CBM can be turned into electrical energy that may be conveniently
transported. Electricity using CMM/CBM can be generated directly using
reciprocating engines or gas turbines. In order to improve generating
efficiency, a combined cycle generation system may be the optimum
choice.

Gas turbines need high-pressure gas, but mixed gas with high temperature
and high pressure is inherently explosive. Safety issues should be
considered.

CMM is usually used by the coal mine area local resident, where relative
small population are. Lack of pipelines is one of the barriers to fully
commercial CMM utilization. So advanced pipeline network is the demand
for CMM development. West-east Pipeline will greatly impact the CMM/CBM
industry, especially the regions along the pipeline.

### 2.3 Transporting CMM

#### 2.3.1 Natural Gas Pipelines in China

During the *Tenth Five Year Energy Development Plan* (2001 -- 2005)
China will increase infrastructure construction to provide longer
pipelines for its gas distribution network. China is focusing on using
clean energy resources and bringing the abundant natural gas reserves
from the western to the eastern part of the country. At the same time,
the natural gas reserves in the East and South China will be produced
and piped to the eastern and southern coastal areas. A loading station
and pipeline network have been built by the WG Company in the Zhujiang
delta to supply natural gas to southern China.

Oil companies are being encouraged to build natural gas pipelines to
better distribute the resource to population centers. The China
Petroleum Natural Gas Group and China Offshore Oil Controlling Company
have begun construction on the first leg of a regional pipeline
distribution network.

#### 2.3.2 West-East Pipeline

Also during the *Tenth Five Year Plan,* the China Petroleum Natural Gas
Co. Ltd. is going to further develop the west-east pipeline network by
building the Seninglan pipeline, the Zhong-wu pipeline, the Shan-jing
double line pipeline, and gas-storage facilities. The total length of
the newly built main pipeline is 6000 - 7000 km. The increased
gas-transmission capacity is 23 - 25 billion m^3^, which is 80 - 85% of
the total gas-carrying capacity 30 billion m^3^.

After 2005, the China Petroleum Natural Gas Co. Ltd. plans to work with
international investors to build gas pipelines and storage networks from
eastern and western Siberia and central Asia to China. Moreover, the gas
pipeline distribution network will be built to supply the largest cities
of eastern China. The distribution of natural gas pipelines in China is
shown in Figure 2-1.

![](media/image8.jpeg){width="5.775in"
height="3.8916666666666666in"}**Figure 2-1 The Distribution of Natural
Gas Pipelines in China**

Natural Gas Quality Standard, GB17820-1999, was issued by Administration
of National Quality and Technology Supervision in July 1^st^ 2001. This
standard stipulates that the maximum heating value is is 31. 4MJ/m^3^,
sulfur must be less than 100mg, H~2~S is must be less than 6mg, CO~2~
must be less than 3%. CMM or CBM must meet these requirements before
injection into a natural gas pipeline system.

At the direction of the State Council, the opening ceremony for the
west - east pipeline was held in Beijing July 4^th^ 2002. These
international partners were present: Royal-Dutch Shell, ExxonMobil, and
the Russian Natural Gas Industry Lt. Company (Gazprom). These partners
and China have formed a joint venture to construct the pipeline. China
Natural Gas Co. Ltd. will direct the project. The pipeline will begin in
Lunnan, Xinjiang, in the west and extend across ten provinces with a
total length 4,000 km and annual transportation capacity of more than 12
billion m^3^**.** The cost of the project is more than 40 billion Yuan.

The pipeline will traverse the deserts, the plateaus, the Taihang
Mountains, the Yellow River, the Huaihe River, and the Yangtze River. It
will be the longest, most expensive, and have the largest carrying
capacity of all of China\'s pipelines. The terrain it traverses is also
the most complex. The initiation of the project is a breakthrough in
developing China's west and redistributing the country's energy
resources. A portion of the pipeline has been completed; running from
Shaanxi to Shanghai. The pipeline began delivering gas to Shanghai
January 1, 2004. The remaining portions of the pipeline will be
completed by and testing will begin in October of 2004, so that by
January of 2005 gas will flow from Xinjiang province to Shanghai and
Zhejiang province.

More details on the pipeline are available on
[*www.chinapipelines.com*](http://www.chinapipelines.com/)

## Chapter 3 The Market for Gas

### 3.1 The Gas Market

CMM is primarily used for residential power and heating, industrial
boilers, and chemical production, and it is an important supplement for
natural gas. It is anticipated however, that demand for CMM/CBM as a
fuel for electrical power plants will be increasing sharply. The
principal factors that influence the demand for natural gas are: the
rate of national economic growth, population growth, environmental
protection concerns, and the changing industrial structure.

Increased use of town gas, LPG (liquid petroleum gas), and natural gas
has led to an improvement of people's living conditions in China. Still
compared with the China's large population, the disparity between the
supply and demand of fuel gas resources is serious, as shown in the
following facts: The per capita gas consumption is low. Total natural
gas production was 32.633 billion m^3^ in 2002.

The insufficient supply of gas in cities has resulted in the restriction
of the utilization range of town gas to household cooking, fuel for
large public buildings, hotels, and restaurants and for some industrial
processes that must use gas as fuel.

The domestic selling prices of natural gas mainly fall into the
following categories in China:

**Well-head price**: Price covers gas recovery from well and
purification cost, but does not include pipeline transportation charge.

**Station price**: Price based on well-head price plus trunk pipeline
transportation charge.

**Price for end-use consumers**: Station price plus charge for pipeline
transportation in urban area and gas tank facilities.

There are gas prices for commercial consumption and gas prices for
domestic consumption within these categories. The gas prices, which are
reforming to adapt to the market economy, must be guided by the
government.

According to statistics for 2001, "the average gas prices of 36 large
and medium cities for domestic consumption was 1.72 Yuan/m^3^, for
industrial use was 1.85 Yuan/m^3^."

CMM is also used in the production of methanol. Methanol is mainly used
for chemical synthesis, or as a fuel or solvent.

In China's chemical industry, there are now more than 200 companies
producing methanol. However, they are mostly small to medium-sized
companies with production capacities of less than 10,000 tons. Most of
them adopt joining-alcohol. They are not cost-effective and the
production rate is slow. Given the complicated processing and expensive
equipment for CMM chemical use, it is not considered to be a viable
option. Some of the CMM chemical use projects in China have failed.

### 3.2 Forecast for the Natural Gas Market in China 

Under current market conditions and pressures for environmental
protection, there is an increasing demand for energy sources that have a
high heating value and are clean burning. According to predictions on
energy demand, the demand for natural gas in China will reach 60 billion
m^3^ and 120 billion m^3^ by 2005 and 2010 respectively. However, the
deliverability of natural gas will reach just 50 billion m^3^ and 80
billion m^3^ respectively. The gap between natural gas supply and demand
in China is widening. The composition of CMM/CBM is similar to that of
natural gas. Therefore, the future market demand for CMM/CBM is
tremendous.

To address the projected gap, in early 2002 China began to build a gas
pipeline to deliver gas from the west to the east. The first stage of
the pipeline will have a transmission capacity of 12 billion m^3^ a
year; the maximum capacity will eventually reach 30 billion m^3^ a year.
Another pipeline is planned to bring natural gas from Russia to China
and will supply 20 billion m^3^ a year.

After 2010, the production of natural gas will supply only 60 percent of
the market demand. Although importing natural gas and petroleum gas can
help fill this gap, there will still be many problems related to cost
and security. Increasing the production of CMM/CBM can help alleviate
the shortage of natural gas.

### 3.3 China's Power Sector

The electric industry is important to the CMM/CBM sector because the
optimum use of CMM/CBM is to generate power.

The electric industry in China is experiencing unprecedented growth.
China produces and consumes a large amount of electricity. To keep pace
with the growth of the national economy, the electrical industry needs
to grow by 5% annually. It is expected that the electrical power
generation market will continue to grow for a long period of time.
China's World Trade Organization (WTO) accession in 2001 has greatly
expedited the reform process and the opening up of the market for
electric power generation. The reforms will not only open the market to
competition but will help to bring positive changes to former industry
monopolies such as electrical power generation.

### 3.4 The Market for Electricity Generation in China

Using CMM to generate electrical power can be a highly profitable
endeavor. China is strongly supportive of this clean energy source and
provides incentives to encourage its development. 1The composition of
electricity capacity of China is shown in Figure 3-1.

In terms of power consumption, secondary industries are the biggest
consumers. In recent years, the percentage rate of growth of the
national economy has decreased. The diminishing growth rate has created
a less demand for electrical power because high-energy consumption
industries such as steel, metallurgy, and chemical products have
required less power. These industries have had to adapt to new
environmental protection and energy conservation policies. All of these
factors have contributed to a decline in electrical power consumption by
the secondary industries. By contrast, residential, business, and
communication sector energy consumption has increased rapidly. In the
future, the development of China\'s electricity requirement lies in this
third industry sector.

The future electrical power market in China can be divided into three
parts:

-   National electrical power network

-   Regional electrical power network, and

-   Provincial electrical power network.

Three phases of electrical power generation reform have been identified:

-   Introduction of competition,

-   Opening up of electrical transmission networks, and

-   Marketing the electricity

China's goals for development of the electrical industry in China are:

-   Expand the electric power supply network

-   Increase the construction of electrical power plants

-   Quickly develop the infrastructure for electrical power.

![](media/image9.wmf)

Figure 3-1. Installed Capacity of Electrical Power Generating Plants, by
Type

The Chinese power market has been reforming. China has opened the power
generation market to foreign participation by allowing cooperation or
the formation of joint ventures with foreign companies, and by allowing
foreign companies to operate without Chinese partners.

Power prices, which are guided by the government, vary from region to
region. The prices also depend on when the power is consumed and whether
it is purchased wholesale. Generally speaking, the price of power bought
from the power grid is 0.4Yuan per kilowatt.

Certainly, there are also barriers to investment in the field. The
Chinese power sector was a monopoly before reform, where all the power
enterprises were owned by the state or the local government. Lack of
detailed regulations is one of the blockages for investors.

# PART 2 THE INVESTMENT AND DEVELOPMENT CLIMATE

## Chapter 4 Economic Development Climate in China 

### 4.1 Summary

After more than twenty years of reform, societal opening, and rapid
development, the level of China\'s productive forces is improving, a
market economic structure has been set up, and the national economy is
advancing. China\'s GDP has increased by an average annual rate of 7-8
percent for more than a decade. Rapid development and industrialization
of such a large population poses challenges for the country's
infrastructure, the economy, and the environment.

There are excellent investment opportunities in the CBM market in China.
China has a steady political structure, a balanced society, and its
economy is growing at a fast pace. China is committed to reform and
welcomes foreign capital. It is enacting laws and policies to better
utilize international investments rationally and effectively. The
efficiency and service of government agencies is increasing,
ameliorating the soft and hard environment for foreign investments. New
laws and policies have been instituted to protect international
partners' rights and interests for mutual benefit and collaborative
development.

For the past twenty years, China has adhered to policies of openness to
the outside world, vigorously developing foreign trade and actively
attracting international investments. The total value of foreign trade
in China is ranked seventh in the world, and the foreign capital
absorbed has been ranked first among the developing countries for the
past eight years. The reform and opening of China has not only promoted
the rapid and healthy development of a national economy in China, but
has also driven reforms of the economic system. It has established a
solid foundation for development in the future and contributed to the
Asian and world economies.

China joined the WTO on December 11, 2001, and became one of the main
commerce members of the organization. Joining the WTO will bring great
benefits to China by enlarging commerce, promoting more economic
reforms, attracting more foreign investment, and promoting legality
building. Some experts think that joining the WTO will make the gross
domestic product (GDP) of China increase by 2.94%.

> *You can read more about economy and trade laws, and news on
> international economy and trade at:
> [www.mofcom.gov.cn](http://www.mofcom.gov.cn/)*

At the end of June 2002, the number of the approved national
foreign-invested enterprises was 405,108, the contracted foreign capital
sum was \$789,281 million, and the foreign capital sum in service was
\$419,802 million. The first ten countries and regions that invested in
China were: Hong Kong, the United States, Japan, Taiwan, Singapore, the
Virgin Islands, Korea, England, Germany, and France.

### 4.2 Development of Coalbed Methane Resources Calls for Participation of More Investors and Foreign Investments 

The Chinese coal mines lack the capital needed for the development and
utilization of coalbed methane resources. They are currently in the
process of reform and transition, however, they are heavily loaded with
historic burdens. Due to a series of reasons including the so called
"triangle-debt" resulting from the arrears in coal sales payment by coal
users over the years, the majority of coal mine enterprises are just out
of their most difficult times, financially. Currently, when there is no
successful example available, the mines find it very hard to invest
venture capital.

### 4.3 Incentives for International Investors

China seeks a variety of international investment programs for the power
generation market. It has established policies and incentives to attract
international capital for the construction of new power generation
plants. In addition to direct investments by international businesses, a
variety of other techniques are being used to bring capital funds to
China, including:

-   Direct financing of the international capital market,

-   Loans from international financial institutions and governments,

-   Build-Operate-Transfer funds, and

-   International trade and technical cooperatives.

### 4.4 The Impact of Greenhouse Gas Emission Reduction Initiatives 

#### 4.4.1 The Greenhouse Gas Effect

Greenhouse gases (GHGs) include carbon dioxide, methane, ozone, nitrogen
oxide, SF~6~, HCFCs, PFCs and water vapor; carbon dioxide being the
predominent constituent. In the past 100 years, temperatures around the
world have risen and, at the same time, GHGs have been increasing
sharply. Many scientists think that the intensification of the
greenhouse effect is caused by the emission of manmade GHGs and may be
the reason for global warming.

Methane, including that found in coal beds, is second only to carbon
dioxide as a leading GHG; the proportion of methane in GHGs is about
18%. Methane has a stronger greenhouse effect than carbon dioxide; in a
100-year time frame, around 21 times that of of carbon dioxide.

Approximately 8-10 billion m^3^ of methane is vented from coal mine
shafts into the atmosphere every year, but the concentration is low. As
this vented methane is a significant GHG, the development and
utilization of coalbed methane helps to reduce greenhouse gas emissions.
Commercial development of CMM in the coal mine regions of China will
reduce the emission of greenhouse gases and reduce environmental
pollution.

#### 4.4.2 Reduction of Greenhouse Gases: United Nations and Kyoto Agreements

To prevent damage to the economy and society that would be caused by
climate change, in 1990 a series of international sessions appealed to
the international community for a global convention to address the
challenge of global climate change. On May 9, 1992, the UN Framework
Convention on Climate Change (UNFCCC) was passed at the UN headquarters
in New York. Most countries signed the UNFCC at the UN Conference on the
Environment and Development. The Convention directed that, from 2008 to
2012, emissions of greenhouse gases in the industrialized countries
should be cut by 5.2% compared with emissions produced in 1990, of which
the European Union (EU) would decrease 8%, the United States 7%, Japan
6%.

There are three \"flexible mechanisms\" in the Memorandum of Agreement
of the UNFCCC:

-   Emissions Trading (ET)

-   Joint Implement (JI)

-   Clean Development Mechanism (CDM).

ET and JI mainly refer to the cooperation between developed countries,
while CDM mainly refers to carbon dioxide emissions reduction trading
between developed and developing countries.

CDM, the Clean Development Mechanism, or carbon dioxide emissions
reduction trading, is used by developing countries. Under this
mechanism, the developed countries can help the developing countries
reduce GHG by sponsoring projects that are in accordance with UNFCCC
conditions. The core of the CDM program is that the developed and
developing countries can acquire and transfer emission reductions
between each other from investment projects. CDM is discussed in detail
in the chapter, *Financing CMM,* below.

The international emissions reduction trade has been very active from
1996 to the present. The reduction authority of 55-70 million tons of
carbon dioxide has been negotiated. The bargain times exceeded 65. The
price has changed too; the cost of an emissions reduction of ten
thousand tons of carbon dioxide is between 0.6 and 3.5 US dollars.

Along with worldwide active progress in developing an international
carbon credit trading system, China's Premier Zhu Rongji announced at
the Earth Summit in Johannesburg that his government ratified the Kyoto
Protocol in September 2001. Many foreign companies have conducted much
investigation on CMM projects to develop possible CDM projects.

## Chapter 5 Preferential Finance and Tax Policies for CMM/CBM Projects

### 5.1 Policies Encouraging CMM/CBM Development in China

Since the 1990s, when it established development planning and industrial
policies, the Chinese government has provided the CBM industry with a
variety of economic incentives. China still supports CBM development and
the incentives have increased over time. To guide and promote the
national economy, China's government enacted three important documents:

List of Comprehensive Utilization of Resources

Catalogue of the Industries, Products and Technologies Currently
Encouraged by the State for Development

Guidance Catalogue of Industries for Foreign Investment

Besides the above 3 documents, in order to speed up the development in
western China, which is relatively poor area, the government of China
launches a programme for developing western China in 2000. The 3
documents and some preferential policies will be discussed briefly
below.

#### 5.1.1 List of Comprehensive Utilization of Resources

In 1996, the State Economic and Trade Commission, the Ministry of
Finance, and the State Administration of Taxation officially placed the
items "coal mine gas recovered and its processed products" and
"utilization of coalbed methane for power and heat generation" in the
revised *List of Comprehensive Utilization of Resources.* All production
and construction projects included in the *List* can enjoy the
comprehensive utilization preferential policies stipulated in five
documents issued by the State Council, the Ministry of Finance, and the
State Administration of Taxation.

Besides the above advantages, comprehensive utilization projects with
CBM development also enjoy the advantages of reduced income tax
according to the No. \[1996\] 36 document issued by the State Council.
The document states: "The enterprises using the wastes in \`The Catalog
of Comprehensive Utilization of Resources\` as raw materials are
duty-free or can reduce the amount of income tax to be paid. Projects
that use wastes generated during the production of their own enterprises
are duty-free for 5 years from the time the projects begins. Those which
use the wastes of other enterprises can be duty-free for one year
according to the approval of the director of tax authorities."

The preferred use of CMM is to generate power. The projects that
generate electricity fueled by CMM and included in the *List* enjoy the
following advantages:

For an enterprise that uses CMM to generate electricity and heat, if its
installed capacity exceeds 500kW, and it is eligible for connecting to
power grid, the power sector should admit its access, and sign a
contract. Thus, the fee for a small thermal power plant to enter connect
to the grid will be exempted and the electricity will be given priority
for sale within the rated electricity amount permitted to enter into the
grid.

The comprehensive utilization power plant whose installed capacity is at
or below 1.2MW does not take part in the electric network peak
adjustment. The comprehensive utilization power plant whose installed
capacity is over 1.2MW plan certain peaking capacity and permit peak
full output, but the power generation load cannot be less than 85% of
the rated power of the generating equipment while in a valley.

#### 5.1.2 Catalogue of the Industries, Products and Technologies Currently Encouraged by the State for Development

In 1997, the State Planning Commission published the *Catalogue of the
Industries, Products and Technologies Currently Encouraged by the State
for Development,* in which, "Coalbed methane exploration, development
and utilization" and "Development and utilization of low heating value
fuels and associated resources in coal mines" were formally listed. The
investors enjoy exemption of import tariffs and import link value-added
taxes if they invest in any projects, such as CMM/CBM projects, as they
are included in the *Catalogue.*

#### 5.1.3 Guidance Catalogue of Industries for Foreign Investment

In 2002, the State Planning Commission, the State Economic and Trade
Commission, and the Ministry of Foreign Trade and Economic Cooperation
jointly issued the *Guidance Catalogue of Industries for Foreign
Investment,* in which two types of investment projects, "Coalbed methane
exploration and development" and "Development and utilization of low
heating value fuels and coal mine associated resources," were included.
According to the *Guidance Catalogue,* foreign investment projects are
put into four categories: encouraged, allowed, restricted, and forbidden
terms. The foreign investment projects classified as *encouraged* can
enjoy preferential treatment in accordance with the stipulations in the
relevant laws and administrative regulations. CMM/CBM projects are
listed in as *encouraged* in the *Guidance Catalogue*.

In China, if there are more than two kinds of mineral resources
available for mining in the same region, the resources are defined as
*main mineral* and *paragenetic or associated mineral* in accordance
with their principal and subordinate roles during exploration and
development. In view of the order in which coalbed methane development
and coal mining are carried out, **coalbed methane projects are divided
into two types in China.** One project type regards coalbed methane
resources as the principal mineral, where coalbed methane exploration
and development on a commercial scale are conducted in the undeveloped
coalfield outside the active mining areas. The projects of this kind
belong to the "Coalbed methane exploration and development" included in
the *Guidance Catalogue of Industries for Foreign Investment,* which can
be managed according to the methods of oil and gas exploration and
development.

The other project type recovers mine gas in active mining areas where
the mining license has been obtained by a coal enterprise according to
law. It belongs to the project of "Comprehensive development and
utilization of low heating value fuels and coal mine associated
resources" included in the *Guidance Catalogue of Industries for Foreign
Investment,* which is managed in accordance with the comprehensive
utilization policies in China. The two types of projects belong to the
encouraged industries for foreign investment. However, they are
different in terms of management method and policy, as discussed in the
chapter, *Procedures for Planning, Approval, and Implementation of
Coalbed Methane Projects.*

#### 5.1.4 Preferential Policies for Western China Development

At the beginning of 2000, the Chinese government began to enact the
strategy to develop its western resource reserves and had a clear
mandate. The State Council established a working group that held a
conference on developing western China. The working group developed a
plan for constructing the infrastructure and environment-friendly
policies required for western China's resource development.

In order to advance the enforcement of the development strategy, the
central and local governments established a series of preferential
policies and rules. Starting from January 1st, 2000, the internal
revenue service began to provide tax incentives, providing the foreign
investment enterprises that located in Midwest China including Shaanxi,
Gansu, and Guizhou CMM areas with a reduced tax rate of 15% for three
years. On June 16, 2000, the China government established and enacted
\"The Contents of Prior Industry Invested by Foreign Businesses in the
Midwest.\" The policies are more attractive to foreign capital and set
up the conditions for foreign investment enterprises. The projects that
adhere to the guidelines presented in the "Contents" document enjoy the
policies in the \"Provisional Rule of Instructing Foreign Investment
Aspects" and "Notice for Further Encouraging Foreign Investment Opinion
Transmitting by the State Council General Office from the Ministry of
Foreign Trade" (NO. \[1999\] 73). The "Contents" clearly advanced this
concept: The development and utilization of CBM and CMM is the primary
industry in Shan\'xi province, Inner Mongolia, Heilongjiang province,
Anhui province, Jiangxi province, and Shanxi province. More information
about this policy is available at :

<http://www.chinawest.gov.cn/english/index.htm>

### 5.2 Current Taxation Policies for CBM Exploration and Development Projects

In order to encourage foreign investors to invest in CBM exploration and
development in China, the Chinese government issued the "Notice on
Taxation Policies Concerning Foreign Petroleum Companies' Participation
in Coalbed Methane Development in China" by the Ministry of Finance and
the State Administration of Taxation. In the document, applicable
taxation policies are stipulated as follows:

Operation income and other incomes obtained by the enterprises that
develop onshore coalbed methane resources in China shall be taxed in
accordance with the stipulates in the "Income Tax Law of the People's
Republic of China for Enterprises with Foreign Investment and Foreign
Enterprises" and Rules for the Implementation.

The stipulations in the "Rules for Implementation of the Income Tax Law
of the People's Republic of China for Enterprises with Foreign
Investment and Foreign Enterprises" regarding "enterprises engaged in
petroleum production" are also applicable to enterprises engaged in
development of onshore coalbed methane resources.

Unless otherwise specified, the stipulations formulated by the Ministry
of Finance, the State Administration of Taxation, and the Offshore
Petroleum Taxation Bureau concerning income tax for the enterprises
engaged in cooperative development of oil resources are also applicable
to the enterprises engaged in the development of onshore coalbed methane
resources.

For the revenues obtained by developing onshore coalbed methane, the
value-added tax and royalty of developing onshore coalbed methane shall
be paid in accordance with the "Notice of the State Administration of
Taxation on Value-added Tax of Petroleum Production in Foreign
Cooperation Projects" (issued by the State Administration of Taxation in
1994) and the "Provisional Regulations Governing Royalty Payment for
Onshore Petroleum Development in Foreign Cooperation Projects" ( issued
by the Ministry of Finance in 1990). Urban real estate tax is about 1.2%
and vehicle and ship license tax varies according to the type, these
taxes should be paid when the purchase happens.

Enterprises engaged in onshore coalbed methane development shall pay
urban real estate tax according to the "Provisional Regulations
Governing Urban Real Estate Tax"; pay vehicle and ship license tax
according to the "Provisional Regulations Governing Vehicle and Ship
License Tax"; and pay stamp duty according to the "Provisional
Regulations Governing Stamp Duty of the People's Republic of China".

In accordance with the above regulations, foreign investors shall pay
the taxes and enjoy the preferential treatment as described below.

#### 5.2.1 Enterprises Income Tax

5.2.1.1 (1) "Income Tax Laws of the People\'s Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises"

According to Item 5 of \"Income Tax Laws of the People\'s Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises\"
(hereafter referred to as the Tax Law) enforced on April 9,1991, \"The
income tax on the foreign investment enterprises and the income tax on
earnings the foreign enterprises received from the production and
operation of institutions set up in China shall be calculated in
accordance with the amount of income that shell be paid, whereas the tax
is 30%, and the local income tax shall be calculated in accordance with
the amount of income that should be paid, whereas the tax is 3%.\"

According to Article 8, \"To the productive foreign-investment
enterprises whose operation period is more than 10 years, the business
income tax is free in the first and second year, and the business tax is
reduced by half from the third year through the fifth years. But to
those enterprises which engaged in such development projects as
petroleum, natural gas, rare metals and noble metals will be regulated
by the State Council. If the actual operation period of the foreign
investment enterprise is less than 10 years, the enterprisesshould pay
the business income tax that was originally tax free and/or reduced.\"

According to Article 9, \"To the industries and projects which we
encourage the foreign businessman to invest, the government of the
province, municipality and the municipality directly under the Central
Government can decide to exempt and reduce the local income tax
according to the practical situation.\"

According to Article 10, \"The foreign investors of the foreign
investment enterprises can directly put the profits obtained from the
enterprise into the investment for the enterprise, increasing the
registered capital, or they can launch other foreign investment
enterprises using these profit as capital. If the operation period is
not less than 5 years, 40% of the income taxes of the reinvestment that
were paid will be returned, following the application of the investor
and the approval of the tax authorities. For those who have the special
preferential policy from the State Council, will transact according to
the regulations of the State Council; for those who leave less than 5
years after the investment, they should return the taxes that were
handed back.\"

According to Article 11, \"If the production operation institutions and
sites set up by foreign investment enterprises and foreign enterprises
in China have losses in a year, they can recoup the losses from the
earnings of the next tax year; if the earnings of the next tax year are
not enough, they can continue to make up year by year, but not to exceed
5 years.\"

5.2.1.2 (2) "Rules for Implementation of the Income Tax Laws of the
People\'s Republic of China for Enterprises with Foreign Investment and
Foreign Enterprises"

According to Article 29 in the Tax Law, the State Council issued \"Rules
for Implementation of the Income Tax Laws of the People\'s Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises\"
(hereafter Rules) on June 30, 1991.

According to Article 32, \"The development-stage investment of the
enterprises engaged in developing oil resources should look at the oil
(gas) field as a unit, add up entirely and payout as capital payout,
then calculate the depreciation from the next month of when the oil
(gas) field starts commercial production.\"

According to Article 36, \"For the enterprises engaged in developing oil
resources, the fixed assets formed by the investment during the
development stage and the period following can be synthetically
calculated as depreciation, without salvage value, and the depreciation
time limit should not be less than 6 years.\" If the economic benefit of
the oil (gas) field is poor or its productive life is less than 6 years,
then the enterprise can apply to calculate the depreciation in
accordance with the production method.

According to Article 48, \"The rational exploration fee of the
enterprises engaged in developing oil resources, can amortize the income
by stages among the oil (gas) fields that have started commercial
production; and the amortization time limit should not be less than 1
year.

In the case where a contract is terminated because no commercial oil or
gas field is found in the contract area of a foreign company, if the
company does not continue to hold contract for exploitation of oil or
gas resources and does not keep its business organization or office in
China. Reasonable exploration expenses of the company in the terminated
area, after reviewed and confirmed by the tax authorities with
certificate, could be amortized in the production revenue from its new
contracted area, provided that the new contract is signed within ten
years after the contract is terminated.\"

5.2.1.3 (3) "The Notice of Tax Issues on Transfer and Receiving
Petroleum Contract Between Foreign Companies"

Article 2 in \"The Notice of Tax Issues on Transfer and Receiving
Petroleum Contract Between Foreign Companies\" specifies, \"The
receiving payout to the foreign company receiving petroleum contract
equity can be looked upon as the exploration fee and the development
investment spending, and will be amortized and depreciated in accordance
with the Rules.

#### 5.2.2 Value-added Tax, Resource Tax, and Royalty

As is the case for regulations for developing petroleum and natural gas
reserves, the value-added tax and resource tax for CBM development
projects invested by international partnerships should be managed in
accordance with the following regulations:

Item 1 in \"The Decision of the Interim Regulations Concerning the
Value-added Tax, Consumption Tax and Sales Tax Applied to Foreign
investment Enterprise and Foreign Enterprise\" issued on December 29,
1993, specifies that, \"The value-added tax is collected in accordance
with the practicality when developing offshore oil and natural gas by
Sino-foreign cooperation, the tax rate and collection method are
regulated by the State Council.\"

At the same time, the State Council issued \"The Notice of the Interim
Regulations Concerning the Value-added Tax, Consumption Tax and Sales
Tax Applied to Foreign investment Enterprise and Foreign Enterprise\"
(February 22, 1994). Item 3 specifies \"Concerning the tax for
developing oil resources by Sino-foreign cooperation, the value-added
tax of crude oil and natural gas is collected in product, the tax rate
is 5%, and a mining royalty will be collected in accordance with
standing regulations, and the resource tax is not collected for the time
being. The tax on inlet items is not deducted when collecting the
value-added tax, and no tax rebate for export of raw oil and natural
gas.\"

The royalty is collected in accordance with \"The Notice of Amended 'The
Interim Provision of the Mining Royalty Paid when Developing the Oil
Resources Onshore by Sino-foreign Cooperation'\" in 1995. The royalty is
collected in real material. Please refer to Table 5-1 and Table 5-2 for
the new regulations.

Table 5-1 Summary of Preferential Finance Policies for CBM Projects

+-----------------------+----------------------------------------------+
| Category              | Preferential Item                            |
+-----------------------+----------------------------------------------+
| Enterprise Income Tax | a\. 30% and 3% local tax, total income tax   |
|                       | rate is 33%                                  |
|                       |                                              |
|                       | b\. tax rate is 0% from 1^st^ -2^nd^ year,   |
|                       | 16.5% from 3^rd^ -5^th^ year                 |
|                       |                                              |
|                       | c\. other local preferential policies        |
|                       |                                              |
|                       | d\. preferential policies on depreciation    |
|                       | calculation.                                 |
+-----------------------+----------------------------------------------+
| Value-added tax       | 5%                                           |
+-----------------------+----------------------------------------------+
| Resource tax          | 0                                            |
+-----------------------+----------------------------------------------+
| Royal                 | 0 to 3% varies with the location and gas     |
|                       | production                                   |
+-----------------------+----------------------------------------------+
| Tariffs               | 0% except those listed in the not exemption  |
|                       | category                                     |
+-----------------------+----------------------------------------------+
| Exploration right     | 100 Yuan/km / yr, but can be exempt          |
| acquisition           |                                              |
+-----------------------+----------------------------------------------+
| Mining right          | 100 Yuan/km / yr, but can be exempt          |
+-----------------------+----------------------------------------------+
| Other tax             | \<1% vehicle and ship license tax and urban  |
|                       | real estate tax etc.                         |
+-----------------------+----------------------------------------------+

#### 5.2.3 Tariffs and Other Taxes

In order to further increase the utilization of foreign investment,
introduce foreign advanced technology and equipment, as well as to
promote industry structural readjustment and technological progress, the
State Council decided that any foreign investment project belonging to
the Encouraged and Restricted B of the *Guidance Catalogue of Industries
for Foreign Investment* can enjoy exemption of import tariffs and to
import link value-added tax, except those listed in the imported
equipment category which are not allowed to enjoy exemption. The
specific measures are executed in accordance with No.1602 Document
issued by the State Administration of Customs in 1997.

Table 5-2. Summary of Preferential Finance Policies for CMM Projects

+----------------------+-----------------------------------------------+
| Category             | Preferential Item                             |
+----------------------+-----------------------------------------------+
| Enterprise Income    | a\. 30% and 3% local tax, total income tax    |
| Tax                  | rate is 33%                                   |
|                      |                                               |
|                      | b\. tax rate is 0% from 1st-5th year          |
|                      |                                               |
|                      | c\. other local preferential policies         |
+----------------------+-----------------------------------------------+
| Value-added tax      | 5%                                            |
+----------------------+-----------------------------------------------+
| Resource tax         | 0                                             |
+----------------------+-----------------------------------------------+
| Royal                | 0                                             |
+----------------------+-----------------------------------------------+
| Tariffs              | 0% except those listed in the not exemption   |
|                      | category                                      |
+----------------------+-----------------------------------------------+
| Exploration right    | 0                                             |
| acquisition          |                                               |
+----------------------+-----------------------------------------------+
| Mining right         | 0                                             |
+----------------------+-----------------------------------------------+
| Other tax            | \<1% vehicle and ship license tax and urban   |
|                      | real estate tax etc.                          |
+----------------------+-----------------------------------------------+

In order to encourage foreign investment in different regions, the local
governments at various levels have worked out a series of preferential
policies regarding auxiliary taxes including local income tax, vehicle
and ship license tax, and urban real estate tax, and others.

The \"Mineral Resources Law of the People's Republic of China\"
stipulates that the acquisition of exploration and development rights
will be executed in China. The user charge for the exploration right is
100 yuan/km/yr within first 3 years. The user charge for the development
right is 1,000 yuan/km/yr. For those who can be exempted, the user
charge may be reduced, exempted, or allowed to be paid after being
approved.

### 5.3 International Cooperative Experience of CBM Projects in China

In 1992, the United Nations Development Program invested \$10 million in
China using the Global Environmental Facility to finance a demonstration
project for developing CBM at coal mines. CBM was developed in the Tiefa
coal mine areas in Liaoning province, the Kailuan coal mine areas in
Hebei province, and the Songzao coal mine areas in Sichuan province.
Additionally, a demonstration project for developing deep CBM reserves
was conducted in the Liulin area in Shanxi province. An extensive
assessment of national CBM resources was carried out by Xi\'an Branch of
China Coal Research Institute. In 1996, the State Council approved the
organization of the China United Coalbed Methane Company (CUCBM) which
is single filed in the state planning and enjoys the exclusive right of
partnering with international companies to explore, exploit, and produce
CBM.

Since the first official CBM production share contract was signed on
January 8, 1998, the CUCBM has endorsed 11 CBM production share
contracts with Texaco, BP-Amoco, Phillips, Virgin Co., Greka, and Lowell
Petroleum of Australia. The contracts were approved by China and
executed successfully. The contract areas included six provinces and
municipalities: Shanxi, Shaanxi, Mongolia, Ningxia, Jiangxi, and Anhui,
with a total area of about 25,000 km^2^. More than fifty exploratory
boreholes were drilled by the end of 2000. The actual risk capital
invested by foreigners was \$76 million.

During the implementation of cooperative development of CBM with foreign
companies, there are not only successful experiences but also failures.
Some of the causes of these failures are discussed below.

### 5.4 Obstacles to Project Development

The concept and idea of coalbed methane development and utilization have
been widely accepted by leadership at all levels from the central
government down to the enterprise level. However, some obstacles still
remain in project development. Only on the basis of our clearer
understanding of these obstacles and by working out relevant solutions
can we finally push the development of the coalbed methane industry in
China to a new high. The following are obstacles to project development
identified by the Chinese.

-   Coalbed methane geological theory calls for breakthroughs

-   China currently lacks the effective method and technical means to
    identify the methane rich zones with high permeability

-   Up-stream and down-stream industry development projects call for
    improvement

-   The state government should make available more favorable coalbed
    methane encouraging policies

## Chapter 6 Financing CMM

In order for China to fully realize the commercial potential of CMM/CBM
reserves, external funding and technical assistance is crucial. A
variety of potential international financing options may be targeted at
different types of projects. This chapter identifies the various funding
mechanisms available to finance CBM development in China, including:

-   International lending programs,

-   Chinese financial institutions,

-   Environmental-protection-related funds, and

-   Private investment programs.

### 6.1 International Financial Institutions and Lending Programs

In general, international financial institutions invest in mature
markets or large-scale projects in developing countries, as well as in
economies in transition. This section describes funding opportunities
through the World Bank and the Asian Development Bank.

#### 6.1.1 The World Bank

The World Bank includes the International Bank for Reconstruction and
Development (IBRD) and its affiliated organization, the International
Development Association (IDA). There are two types of loans from the
World Bank: the IBRD loan, also known as a hard loan because of its less
favorable terms; and the IDA loan, commonly known as a soft loan with
its more favorable terms. For China, hard loans have a 20-year repayment
period, which includes the 5-year grace period when only interest
payments and a yearly commitment fee of 0.75% is required. Soft loans
have a 35-year repayment time frame, an additional 10-year grace period,
and a yearly commitment fee of 0.5%. The interest free handling fee rate
is 0.75%.

When hard loans and soft loans are arranged together, the overall loan
costs are lower. A commitment fee of 0.5--0.75% is assessed for signed,
but undisbursed loans. Generally, there is no commitment fee for
bilateral loans granted to two entities. It is helpful if all of the
paper work is in place at the time of application, in order to speed up
the payment process and minimize the commitment fee.

When several countries apply for a World Bank loan, the "Pool System"
applies, which means that the individual countries will take on hidden
market risks because several types of currencies are involved.

Since 1981, World Bank loans have increasingly been utilized by China
with very positive results. Eighty percent of the loans have been used
for agricultural projects, infrastructure establishment, and basic
industry.

#### 6.1.2 Asian Development Bank

The Asian Development Bank (ADB) is a regional international financial
institution whose goals are to provide loans and technical support as
well as to promote regional economic development and cooperation. ADB
primarily works with project loans, technical support, stock investment,
and joint investment. It approves loans and determines the amount of the
loan after experts have carried out feasibility studies. ADB loans are
granted for agriculture, energy, industry, communication,
transportation, water supply, and urban development, with an emphasis on
agriculture and energy projects in developing countries. The basic loan
approval process is:

-   Applicant submits an application to the ADB through their
    government.

-   ADB determines the credit status of the applicant.

-   Terms of the loan are negotiated.

-   Loan is finalized and approved.

The ADB actively supports projects that contribute to the establishment
of China's infrastructure. In the past 35 years, it has provided China
with 7.4 billion United States dollars (USD) in loans used for
infrastructure establishment, especially communication and energy
projects such as the Shanghai Nanpu Bridge Project, Environment
Improving and Energy Utilization Projects, and the Shen-Da Power
Transmission and Distribution Project. According to the agreement of
July 2001 between the ADB, China's State Planning Commission, and the
country's Ministry of Finances, the ADB will provide a general term loan
for 200 million USD for CBM development in China. ADB financing has paid
for the "Yangquan Mining Area CBM Demonstration Project" for the
Yangquan Coal Mining Group Company. In addition, the ADB will finance a
"Feasibility Study on the CBM Demonstration Project in Jincheng, Shanxi
Province" for Jincheng Anthracite Group Company. The company will
establish a CBM fired power plant with a 120 MW capacity. The technical
assistance program for this started in July 2002.

### 6.2 Environmental Protection Related Funds 

Because the development and utilization of CBM is beneficial to the
global environment, some environmental organizations are willing to
provide CMM/CBM development projects with capital, subsidies, or
technical support. The organizations discussed below are potential
sources of funding for CBM projects in China.

#### 6.2.1 The Global Environment Facility (GEF)

The GEF is a special fund for environmental protection projects and
activities for developing countries. The GEF is used to fund projects in
four main areas:

-   Global warming

-   Worldwide water pollution

-   Biological diversity

-   Damage to the ozone layer.

The GEF originated from the donations of member countries, primarily the
developed countries. In general, the World Bank, the United Nations
Development and Planning Program (UNDP), and the United Nations
Environment Program (UNEP) are responsible for the implementation of GEF
projects. The responsibilities are divided as follows: UNDP provides
technical aid and training and oversees minor donation projects; UNEP
promotes science and technology development, advances environmental
management, and oversees the Science and Technology Consulting
Committee; and the World Bank assists its member countries to conserve
and sustainably use their biological diversity, reduce their emissions
of greenhouse gases, manage shared water bodies, and reduce their
emissions of ozone-depleting substances by accessing GEF resources to
cover the incremental costs of additional actions on these global
issues.

In 1992, the UNDP cooperated with the Ministry of Energy Resources of
China to initiate the project "Exploration of China CBM" which was
funded by the GEF. The project was later taken over by the State Coal
Mining Industry Bureau. It was composed of three sub-projects for CBM
exploration in the Songzao Coal Mining Administration, the Kailan Coal
Mining Administration, the Tiefa Coal Mining Administration, and a
sub-project for evaluating CBM resources in the Xi'an Branch of China
Coal Research Institute. The GEF provided 10 million USD in funding, and
China provided 7 million USD in matching capital.

At present, these demonstration projects have been completed and
accepted by the UN evaluation team. The evaluation team concluded that
the projects have achieved great success and met their goals. These
goals were to produce and use CBM to improve the environment in these
areas and to improve China's independent commercial CBM developing
capability through training, conferences, and advanced CBM technical
demonstrations. More importantly, these CBM demonstration projects have
brought this new energy source, and its associated increase in mine
safety, to the attention of the Chinese government. As a result of these
successful demonstration projects, the Chinese government has issued new
policies encouraging CBM exploration and development.

#### 6.2.2 United Nations Development Programme (UNDP)

A project called "Deep Exploration of CBM" began in August 1993 and was
completed in December 1996. Its goal was to explore deep CBM reserves as
a potential new source of energy for China. The total investment was 1.7
million USD, of which the UNDP invested 1.3 million USD and the Chinese
government invested 400,000 USD. The project was carried out by the UNDP
and the Foreign Trade and Economy Cooperative Technology Exchange Center
and was implemented by the northern China Petroleum Geology Bureau under
the former Ministry of Geology and Mineral Resources.

The Liulin region of Shanxi Province was selected for deep CBM
exploration as part of the project. Seven experimental CBM wells were
drilled. The maximum gas output for a single well exceeded 7,000 m^3^/d
with an average of 1,000-3,000 m^3^/d. Other benefits gained from the
project included learning key techniques for CBM exploration, training
geologic and engineering personnel, and bringing advanced equipment and
software to China. Thus, this project provided the initial critical
training for Chinese personnel and advanced the technical capabilities
of China for CBM exploration.

#### 6.2.3 United States Environmental Protection Agency (USEPA) and the China CBM Clearinghouse

In 1994, with funding of 650,000 USD and with a 5-year time limit, the
U.S. Environmental Protection Agency (USEPA) cooperated with the former
Ministry of the Coal Industry to establish the China Coalbed Methane
Clearinghouse in the China Coal Information Institute. The function of
the China CBM Clearinghouse is to:

-   Inform policymakers and mining officials about the potential of
    Chinese CBM

-   Study and put forward policy proposals to encourage the exploration
    of CBM in cooperation with foreign investors

-   Provide information to U.S. companies that are interested in the
    development of Chinese CBM

-   Arrange field investigations

-   Conduct international conferences

#### 6.2.4 United States Department of Energy (USDOE) 

In November 1994, the USDOE and the China State Science and Technology
Commission signed a cooperative agreement to carry out a joint project
entitled the "China Climate Change Study" to evaluate the effects of
climatic change and propose corresponding countermeasures. As part of
the project, the USDOE funded the "Technical Evaluation of Greenhouse
Gas Mitigation and Development Strategy Study." Additionally, the China
CBM Clearinghouse completed a research report entitled "Technology
Assessment and Development Strategies of CBM Recovery and Utilization".
The report suggested that, at the present time, exploration and
development of CBM should focus on existing coal mine areas. The report
also put forward a proposal to set up three demonstration projects in
the following areas:

-   The CBM Exploration and Utilization Project in the Hanzhuang Mine
    Fields of Yangquan Mining Area and Shouyang District

-   The Underground CBM Extraction Project in the Pansan Mine, Huainan

-   The CBM Fired Electricity Generation Demonstration Project in the
    Jincheng Mining area

The experiences and problems encountered in the process of implementing
these three projects will be helpful for future CBM development
projects.

#### 6.2.5 The Green Aid Project (GAP) of Japan

Environmental problems have affected sustainable development around the
world. In 1991, the Ministry of International Trade and Industry of
Japan recommended the implementation of the GAP. New Energy and
Industrial Technology Development Organization of Japan (NEDO) carried
out the GAP. Japan invested 7 billion USD in the GAP between 1993 and
2000. Southeast Asia and China received the GAP funding. The GAP also
funded equipment and technology for environmental protection, clean coal
utilization, and exhaust gas-cleaning projects in other countries.

In February 1998, a CBM demonstration project in the Tiefa mining area
was also funded by the GAP. Japan provided 3 billion Japanese Yen
(US\$25 million, 1US\$=118.7 JPY) in capital and China provided 2
billion JPY in capital. Japan also provided the project with two drill
rigs, three bailers, and three sets of pipeline monitoring systems.
Thirty-three boreholes were drilled in the Daxing Mine and a record high
extraction rate of 37% was reached in Tiefa. This technique has also
been used in other mines in the Tiefa mining area. Japan provided the
surface system with a gas tank with a capacity of 17.5 thousand m^3^, a
set of dehumidifiers, heat adjusting equipment, and surface monitoring
devices. The surface piping will soon be completed. The project is
capable of supplying 50,000 m^3^/d gas for 60,000 families in Tieling
City when it ended in 2003.

#### 6.2.6 The Clean Development Mechanism (CDM) Program of the Kyoto Protocol

The CDM is a surety mechanism that allows contracting parties to
implement partial external gas mitigation promises as described in Annex
I of the Kyoto Protocol. Its function is to help contracting parties not
listed in Annex I to realize sustainable development and achieve the
goals of the Climate Change Framework Pact. In addition, the CDM program
helps the contracting parties listed in Annex I comply with the
quantitative promises for gas restriction and mitigation described in
Clause 3 of the Kyoto Protocol.

The core of the CDM program is that the developed and developing
countries can acquire and transfer emission reductions between each
other from investment projects. The Chinese government actively supports
the CDM program as a means to improve energy efficiency. The Chinese
businesses hope to obtain technologies that cannot be obtained from
regular commercial channels, and to increase the opportunities for
obtaining international financing.

Many foreign investment institutions support the CDM initiative. The
following are some major international institutions that use the CDM.

#### 6.2.7 Prototype Carbon Fund (PCF)

The PCF is the main fund that the World Bank uses for the Clean
Development Mechanism (CDM). It features a closed mutual fund with 145
million USD capital from six governments and 17 companies, including
Canada, Finland, Norway, Sweden, the Netherlands, and Japan Bank for
International Cooperation. Each government invested 10 million USD and
each company invested 5 million USD. The present CO~2~ price for the PCF
(prototype carbon fund) is 3-4 USD/ton. The PCF uses the following
criteria to select projects:

-   The project shall be in accord with the standards of the World Bank
    and UN Climate Change Framework Pact.

-   The carbon purchases shall be between 3 million and 15 million USD
    for each project.

-   Projects should involve multiple countries.

#### 6.2.8 Certified Emission Reduction Unit Procurement Tender (CERUPT) 

CERUPT carries out CDM programs for the Dutch government. The Dutch
government obtains the necessary Certified Emission Reductions (CER) by
investing in the CDM projects of other countries. CERUPT established
open bidding for purchases according to European Union (EU) protocols.
(Project bidding is carried out according to prescribed procedures, and
the candidates are determined by screening. The selected company will
then submit its project proposal report.)

As of 2001, the Dutch government was planning to purchase at least 3
million units of CERs. At least 100,000 CERs were to be purchased for
each contract, with no upper limit. Responsibility for CDM in The
Netherlands is with the Ministry of Housing, Spatial Planning, and the
Environment. The Ministry also specified the maximum prices per ton
CO~2~ it is willing to pay for CERs produced by different CDM project
types as follows:

+------------------------------------------------------+---------------+
| Renewable energy sources (except materials)          | 5.5           |
|                                                      | Euro/tonne    |
+------------------------------------------------------+---------------+
| Energy production by using clean, sustainable grown  | 4.4           |
| biomass                                              | Euro/tonne    |
|                                                      |               |
| (excluding waste)                                    |               |
+------------------------------------------------------+---------------+
| Energy efficiency improvement                        | 4.4           |
|                                                      | Euro/tonne    |
+------------------------------------------------------+---------------+
| Others, including fossil fuel switch and methane     | 3.3           |
|                                                      | Euro/tonne    |
+------------------------------------------------------+---------------+

#### 6.2.9 The United Nations

A number of UN agencies, such as the United Nations Development
Programme, are involved in the CDM capacity building program. With the
support of the UNDP, the Energy Source Research Institute of the State
Planning Commission of China initiated the UN fund support project
"China CDM Capability Construction Project". China Coal Information
Institute undertook part of this project. In January 2001, the
"Technology Conference on China's CDM Construction Capability Project"
was held in Beijing. The conference focused on the topics of CBM, energy
efficiency, and renewable energy resources. Experts from these three
areas presented technical reports. The general representative of the
UNDP and representatives from the Department of Treaty and Law of the
Ministry of Foreign Affairs, the Climate Change Office of the State
Planning Commission, and related research institutes and enterprises
attended the conference. They discussed the CDM proposal and the
framework of the construction capability, the basic use and distribution
of capital, and recommended potential projects in each area. Jincheng
Coal Mine Methane Power Generation Project and Huainan Coal Mine Methane
Household Utilization Project were recommended. The PCF applications of
those two projects were submitted.

# PART 3 STEP BY STEP: DEVELOPING 

# A PROJECT

## Chapter 7 Procedures for Planning, Approval, and Implementation of Coalbed Methane Projects

### 7.1 History of International Partnerships Formed for CMM/CBM Development 

By the end of the 1980s China had begun to successfully identify and
develop CMM/CBM reserves. After observing the successful development of
CMM/CBM in the United States, many international companies sought
partnerships with China to develop its abundant CMM/CBM reserves. A
total of twelve international partnerships were initiated during this
early phase. However, because few policies were in place to govern such
partnerships, many problems arose.

These are some of the difficulties encountered early on in the first
international partnerships:

-   Chinese interests were not honored in some of the contracts.

-   Some companies contracted for CMM/CBM tracts without assessing or
    developing them, thus delaying the development of the prospects.

-   Money was spent on some projects with few positive results.

-   Interdepartmental conflicts arose when two or more state agencies
    were working with separate international partners in the same coal
    mining area.

-   Some international firms conducted exploratory operations in
    military areas that were designated as off-limits.

-   Some contracts conflicted with existing laws and regulations.

### 7.2 China United Coalbed Methane Company Limited (CUCBM)

In 1995, the State Council of China established the China United Coalbed
Methane Company Limited (CUCBM) to coordinate all phases of
international partnerships for CMM/CBM exploration and development.
CUCBM has the monopoly right concerning CMM/CBM exploration,
development, and production through cooperation with foreign firms.
CUCBM is responsible for relevant tendering, negotiation, contract
signing, and implementation once a target block is approved by the
competent state authorities.

In 1998, CUCBM signed the first production sharing contract for CMM/CBM
reserves with Texaco for the Huaibei mine of Anhui Province. Since that
time, CUCBM has made a great deal of progress in establishing
international partnerships. By the end of 2001, CUCBM had signed 11
production sharing contracts with foreign companies including Texaco,
Phillips, ARCO, Greka, Virgin, and Lowell. These contracts are for a
land area of approximately 25,000 km^2^ and the CMM/CBM reserves total
about 2 trillion m^3^.

China United CBM Co. is responsible for the concrete business regarding
China's coalbed methane exploration and development projects involving
foreign cooperation. In accordance with the "Production Share Contract"
approved by the Ministry of Foreign Trade and Economic Cooperation,
China United CBM is responsible for negotiating with foreign companies,
signing contracts, and jointly exploring and developing coalbed methane
resources in the cooperation blocks approved by the state. (The Standard
Contract, discussed in detail in chapter 10, was designed to meet the
requirements of cooperatively developing China's CBM resources and open
bidding issues. It is based on China's oil international cooperation
model and addresses the specific characteristics of China's CBM
development.) If a commercial coalbed methane field is found, China
United CBM and the foreign party jointly establish an organization with
no legal person right, invest in certain proportions, and jointly
conduct development and production.

#### 7.2.1 CUCBM Co.'s Role in CMM/CBM Projects

Foreign companies who would like to participate in coalbed methane
surface development projects in China will have to cooperate with China
United CBM. China United CBM is authorized with unique jurisdiction over
coalbed methane development and cooperation activities. China United CBM
has established commercial, technical, and legal procedures for coalbed
methane project development. We discuss these approval procedures for
CBM cooperative activities in more detail below.

One major concern of foreign companies is how CMM cooperative
development in coal mine areas should be executed. If a CMM development
project designed for implementation in coal mine areas is to be realized
by foreign grants or free technical assistance, that is, if the projects
are *non-profit-making and non-commercial in nature,* it is not
necessary for China United CBM to get involved. But if the CMM
development projects to be carried out in coal mine areas are commercial
in nature, the projects are to be implemented with the involvement of
China United CBM representing the Chinese side. To date, China United
CBM has not formed particular rules or practicable operational methods
for these sorts of cooperative activities, nor has the Chinese
government prepared any particular policies in this regard.

We recommend, therefore, that for the cooperative implementation of CBM
projects to be developed from the surface, contacts should be made with
China United CBM. Barring new legislation or newly developed procedures,
the approval procedures described in this section should be followed.
The most feasible procedure for the implementation of cooperative
activities on coal mine methane projects in coal mine areas is covered
by the general regulations concerning foreign investments discussed
below.

### 7.3 Types of Foreign Cooperation for CMM/CBM Exploration/Development Projects

Foreign companies that decide to invest in CMM/CBM in China can choose
various investment forms, including:

-   Chinese-foreign joint venture,

-   Chinese-foreign cooperation,

-   Full foreign investment.

The State's **"Law of the People's Republic of China on Sino-foreign
Joint Equity Enterprises",** the **"Law of the People's Republic of
China on Sino-foreign Cooperative Enterprise,"** and the **"Law of the
People's Republic of China on Wholly-Foreign Owned Enterprises,"**
discussed in detail in the *Laws and Regulations* chapter below,
guarantee the legal rights of the investors.

### 7.4 Coalbed versus Coal Mine Methane Projects

Specific projects call for different types of investment. A *coalbed
methane exploration and development project* is intended to develop
coalbed methane resources on a large scale, using either of two
investment forms: Chinese-foreign cooperation, or independent foreign
investment. However, for a *coal mine methane recovery and use project,*
because coal mine methane is developed within areas where exploration
and mining rights have already been obtained, foreign investors can only
participate using Chinese-foreign cooperation or Chinese-foreign joint
venture, according to the principle of exclusive exploration and mining
rights outlined in Chinese law. These stipulations are discussed in more
detail in the next chapter.

In China, if there are more than two kinds of mineral resources
available for mining in the same region, the resources are defined as
*main mineral* and *paragenetic or associated mineral* in accordance
with their principal and subordinate roles during exploration and
development. In view of the order in which coalbed methane development
and coal mining are carried out, **coalbed methane projects are divided
into two types in China.** One project type named as CBM project regards
coalbed methane resources as the principal mineral, where coalbed
methane exploration and development on a commercial scale are conducted
in the undeveloped coalfield outside the active mining areas. The
projects of this kind belong to the "Coalbed methane exploration and
development" category included in the *Guidance Catalogue of Industries
for Foreign Investment* (discussed in chapter 5), which can be managed
according to the modes of oil and gas exploration and development.

The other project type named as CMM project recovers mine gas in active
mining areas where the mining license has been obtained by a coal
enterprise according to law. It belongs to the project of "Comprehensive
development and utilization of low heating value fuels and coal mine
associated resources" category included in the *Guidance Catalogue of
Industries for Foreign Investment,* which is managed in accordance with
the comprehensive utilization policies in China. The two types of
projects belong to the encouraged industries for foreign investment.
However, they are different in terms of management method and policy.

***Approval Procedures for CBM Development Projects***

The approval procedure for CBM exploration projects in coal mining areas
is basically the same as the procedure for CBM cooperative projects in
undeveloped fields. The differences between them are as follows:

When gaining approval for international partnerships to explore for
surface CBM exploration near or in active coal mine areas, it is
important to work with the coal mine management at the beginning of the
process. Existing coal mine operations should take precedence over the
exploration for surface CBM reserves.

Under the coordination of the Chinese government, the short- and
long-term goals for the mining operations should be established, and the
surface CBM exploration should be integrated with those goals. If
potential conflicts are identified, the international partnership should
meet with the coal mine management to resolve the issues. Ultimately,
the objective is to maximize the efficiency of both the coal mine
operations and the surface CBM exploration program.

### 7.5 CMM Development Projects 

When foreign businesses want to invest in underground CMM exploitation
projects and the comprehensive utilization projects of coal mine gas in
active coal mines or coal mines that are being built in China, these
projects are examined and approved according to general provisions for
the investment of foreign businesses. Projects with estimated costs
above the investment norm (30 million Yuan, e.q. 3.6 million US\$)
should be reported to the State Development and Reform Commission for
examination and approval. Projects with a cost less than the investment
norm should be examined and approved by planning commissions from the
province and municipality directly under the Central Government and
cities listed in the plans.

***Steps for Approval of CMM Projects***

1\. First of all, the foreign company should have a project team charged
with the responsibility to contact the Chinese side on technical and
commercial affairs.

2\. The foreign company should undertake surveys on China's coalbed
methane resources in coal mine areas and Chinese coal companies that
plan to join in the cooperation. In order to facilitate the work
involved in this period, the participating foreign company may refer to
China Coalbed Methane Clearinghouse for assistance. Surveys to be
implemented in this period of time include analysis of China's coalbed
methane development favorable blocks, information and data about coal
production in China, as well as coal mine area development plans and
ways of commercial cooperation. The final purpose is to determine the
coal mine companies for cooperation.

3\. The foreign investing party carries out talks and signs a letter of
intention of cooperation or joint-venture operation with the relevant
Chinese coal companies (the Chinese side) that intend to enter into the
cooperative activities in coal mine methane development.

4\. The Chinese side compiles and submits the project proposal. The
appropriate government departments at different levels ratify the
project proposal. This process is also known as project initiation.
During the process of project initiation, the ratifying government
departments demand the approval documents, to be applied for by the
project implementing parties, from the relevant government departments
such as the environmental protection bureau, land management department,
water resources management department, and others. Documents required
for the implementation of the project also include those that address
project financing and supporting documents. China International
Engineering Consulting Corporation evaluates the project before the
National Development and Reform Commission (NDRC) gives its final nod.

5\. The project is reported to the National Development and Reform
Commission (NDRC) or Provincial Development and Reform Commission (PDRC)
according to the size of the investments involved.

6\. Upon the ratification of the project proposal, both parties work out
a feasibility study report.

The project implementing parties, according to the requirements
stipulated in the project approving documents, entrust qualified design
and research institutes to work out the project feasibility study
report. This report should be divided into several parts, including:

-   Engineering survey,

-   Rock and earth engineering survey,

-   Detailed hydrology survey, and

-   Engineering environmental impact report.

These should be accompanied by approval documents, including:

-   The project proposal,

-   Environmental impact report,

-   Approval documents provided by land management departments on land
    use, and

-   Documents provided by water resources management authorities on the
    consumption of water.

Then, the case is reported to the designated approval authority for
approval in the same way that the project proposal is submitted and
approved.

7\. The two parties sign a contract governing the setting up of a
business entity and a charter of a new company after the approval of the
project feasibility report.

8\. The case is reported to the Ministry of Commerce or provincial
commerce authority department.

9\. Once the contract and charter are ratified, the ratification
documents are submitted to the local Industrial and Commercial
Management Bureau for registration of the legal enterprise established.

10\. Finally, it is necessary to go through other company procedures,
for example opening a bank account, taxation registration, customs
registration, registration with the Administration of Foreign Exchange,
as well as other related affairs.

### 7.6 CBM Development Projects 

So far there is no coalbed methane development project with independent
foreign investment in China. Coalbed methane exploration and development
projects can refer to the procedures for Chinese-foreign cooperation for
oil and gas development, namely the "Product Sharing Contract". This
type of product sharing contract normally has a contract time of thirty
years, divided into three periods: exploration, development, and
production. It should be noted that the coalbed methane product sharing
contract enjoys more preferential treatment than that of the
conventional oil and gas production sharing contract in terms of
extended contract time, reservation time, return of blocks, and various
fees and expenses paid by foreign parties.

China United CBM shall sign coalbed methane contracts with foreign
companies after negotiation based on the articles of the "Production
Sharing Contract". The general principles are:

-   Ensuring national sovereignty;

-   Ticking to mutual economic benefit;

-   Jointly managing the coalbed methane operation;

-   Exploration risk is undertaken by the foreign party only; and

-   Technology is transferred from the foreign party to the Chinese
    party.

In the light of the above-mentioned principles, the main points
regarding foreign cooperation in coalbed methane are as follows:

-   Coalbed methane resources in the contracted areas for foreign
    cooperation shall be owned by the People's Republic of China.

-   The investment interest of the foreign party shall be protected by
    Chinese laws, meanwhile the foreign party shall be subject to
    Chinese laws.

-   The foreign party should provide exploration investment and
    independently undertake the exploration risk. After a commercial
    coalbed methane field is found, the two parties shall input certain
    investments and jointly carry out development and production.

-   The foreign party has the right to withdraw during exploration from
    the coalbed methane contract after it has completed the minimum work
    of different stages of the period.

-   During the exploration period, the contract areas (except the
    development area and production area) should be returned to the
    Chinese party gradually.

-   Under the management of the Joint Management Committee with the
    Chinese party acting as the Chairman, the foreign party is the
    operator. After the exploration and development investment has been
    recovered, the Chinese party has the right to take over the coalbed
    methane operation.

-   All the materials and data obtained from the operation in the
    contracted area shall be owned by the Chinese party.

-   After the development investment is recovered or the contract is
    terminated, the assests in the contract area shall be owned by the
    Chinese party.

-   The contract effectiveness, right transfer, and overall development
    plan for the coalbed methane field shall be approved by the Chinese
    government department concerned.

-   The foreign party shall give priority to employing Chinese
    personnel, and give priority to Chinese contractors and services
    under the same condition.

-   The foreign party shall provide training for and technology transfer
    to Chinese personnel.

-   The foreign party can receive a return on investment and expenses
    from the coalbed methane production, and get a profit in accordance
    with the contract stipulations.

-   The foreign party shall pay various taxes and royalties according to
    the Chinese laws.

-   The Chinese party shall help operators solve problems in the coalbed
    methane operation.

The CUCBM insists on two rules regarding CBM exploration:

-   To avoid infringing upon the existing coal mining company in a
    region, CUCBM does its best to exclude the coal mining area from the
    CBM-potential area when cooperating with international partners to
    develop a CBM project.

-   It is considered that the coal mining company has the priority to be
    one of the Chinese partners for development of the CBM when
    cooperating CBM exploration is adjacent to or within the coal mining
    area.

***Steps for Approval of CBM Projects***

1\. First of all, the foreign company should set up a project team in
charge of contacts with the Chinese side on technical and commercial
affairs of common concerns.

2\. The foreign company should carry out surveys on China's coalbed
methane resources and the favorable blocks. For the best possible
results of work at this period of time, the foreign company may contact
China Coalbed Methane Clearinghouse for assistance. The results of this
period of work are aimed at identifying the favorable blocks that the
foreign company decides to develop.

3\. The foreign company submits to CUCBM a letter of intention on the
cooperative development activities. The foreign company may also carry
out a joint study on the coalbed methane development potentials with
CUCBM.

4\. China United CBM prepares relevant materials according to the
regulations (please refer to the appendix, "Regulations for Registering
to Explore for Mineral Resources Using the Block System"). Then, China
United CBM applies to the Ministry of Land and Resources (MOLR) for the
cooperative block exploration license, i.e., the mineral exploration
right. China United CBM also applies to the Ministry of Commerce for
opening-to-the-outside right.

5\. During the course of waiting for approval of the competent
authorities, the foreign company and China United CBM may proceed to
negotiate on the product-sharing contract relating to the coalbed
methane resources exploration in the cooperation blocks.

6\. Upon approval of the applications, the two sides sign official
contracts.

7\. The contracts signed are submitted to the Ministry of Commerce. Once
the contracts are approved, both parties involved in the contracts
jointly implement the contracts.

8\. The two sides involved set up a Joint Management Commission for the
implementation of the contracts.

## Chapter 8 Laws and Regulations Applicable to the Development of CMM/CBM Resources

**"Mineral Resources Law"** is the basic law of the Chinese mining
industry. The law covers general issues regarding mineral resources on
the whole, and clearly specifies that:

-   Mineral resources shall be owned by the State;

-   The State's ownership of mineral resources shall be exercised by the
    State Council;

-   The State shall adopt the system that the exploration and mining
    rights are to be obtained with compensation;

-   The exploration licensees have the privileged priority to obtain the
    mining right to the mineral resources in the exploration area; and

-   The Ministry of Land and Mineral Resources shall be responsible for
    supervising and administering the exploration and mining of mineral
    resources throughout the country.

**"Coal Law of the People's Republic of China",** put into effect on
December 1, 1996, is the only law in China for a single mineral. Article
35 of the Coal Law stipulates that the State shall encourage coal
enterprises to comprehensively develop and utilize coalbed methane.

For the purpose of ensuring the management of mineral resources properly
and within the legal system, China has also promulgated a series of laws
and regulations concerning mineral resources. The main enforced mineral
resources management laws, rules, and regulations concerning coalbed
methane are as follows:

**"Regulations for Registering to Explore for Mineral Resources Using
Block System",** entered into force on February 12, 1998, specifies in
detail the following legal systems:

-   The Block Registration System;

-   The maximum area limitation system for exploration blocks;

-   The system of exploration rights acquisition with compensation;

-   The exploration donor system;

-   The exclusive mining right system;

-   The minimum exploration investment system;

-   The exploration right pricing system;

-   The mining right reservation system;

-   The special oil and natural gas exploration system.

**"Regulations for Registering to Mine Mineral Resources",** entered
into force on February 12, 1998, specifies in detail the following legal
systems:

-   The approval and registration system;

-   The pre-application system for mining area;

-   The mining right licensing system;

-   The compensation system for obtaining mining right;

-   The pricing system of mining right;

-   The mining right bulletin system;

-   The special system concerning oil and natural gas development
    management;

-   Identification of boundaries of mining areas;

-   Other systems of mining right.

**"Regulations for Transferring Exploration Rights and Mining Rights"**
(included as an appendix at the end of this volume), entered into force
on February 12, 1998, stipulates

-   Terms and conditions,

-   Procedures for exploration and mining rights transfer,

-   Certification of evaluation of the organization involved in
    exploration and mining rights transfer, as well as

-   Identification of evaluation results .

**"Regulations of People's Republic of China Concerning the Exploration
of Off-shore Petroleum Resources in Cooperation with Foreign
Enterprises",** and **"Regulations of People's Republic of China
Concerning the Exploration of On-shore Petroleum Resources in
Cooperation with Foreign Enterprises".** These two regulations are the
exploration and mining administrative regulations applied to coalbed
methane development involving Chinese-foreign cooperation. The two
regulations stipulate

-   The ownership of mineral resources,

-   Governmental administrative departments and their power,

-   Organizations responsible for contract examination and approval,

-   Rights and responsibilities of each party in petroleum contracts,

-   Agreements reached for oil production, and

-   Rules to be complied, as well as

-   Methods of settling disputes.

## Chapter 9 Contracts for CMM/CBM International Cooperation

### 9.1 Summary

As an emerging industrial sector, the coalbed methane industry in China
is characterized by high risks in investment. This makes it more
appropriate for China to adopt international cooperation in the initial
stages of exploration and development. International cooperation in
these projects allows China to learn the required advanced technology
and gives foreign investors the opportunity to promote coalbed methane
development and utilization.

The basic Chinese principles for coalbed methane development through
international cooperation include the following:

-   The resources are owned by the Chinese state.

-   The development activities and facilities are subject to the
    jurisdiction of the ownership country.

-   The ownership country has priority.

-   The development project yields a "win-win mutual benefit" under the
    prerequisite of the protection of nature and maintaining ecological
    equilibrium.

This "win-win mutual benefit" is in essence the establishment of a
mutually profitable partnership on the basis of the commonly accepted
value according to international standards and internationally accepted
practice, so that both business partners can obtain reasonable profits
out of the cooperation.

At present, the international cooperation for surface development of
coalbed methane follows the mode of product sharing contracts, which
effectively avoids or reduces the exploration risks on the part of the
resources' ownership country and protects the interest of the foreign
investors to the maximum. This mode is also helpful to improve the
project quality and reduce project costs. These contracts are explained
in detail below.

Due to the fact that coalbed methane development and utilization in coal
mine areas always go hand in hand with coal mining operations in a
well-coordinated way, coalbed methane development projects must include
coal mines as participants. Joint business operations and other project
operation modes have been applied to ongoing coalbed methane development
and utilization projects implemented in some coal mine areas. Specific
coal mine area coalbed methane projects shall select appropriate modes
of cooperation according to their own characters, to be decided upon by
the participating parties on the basis of their negotiations.

### 9.2 Foreign Cooperation Policies

In the *Guidance Catalogue of Industries for Foreign Investment,*
discussed in more detail in Chapter 5, jointly issued by the State
Planning Commission, the State Economic and Trade Commission, and the
Ministry of Foreign Trade Economic Cooperation, "coalbed methane
exploration and utilization" and "comprehensive development and
utilization of low heating value fuels and coal mine associated
resources" are listed as the encouraged industries for foreign
investment. Foreign companies can choose various investment forms,
including Chinese-foreign joint venture, Chinese-foreign cooperation, or
full foreign investment, for example, to develop coalbed methane in
China. The State's "Law of the People's Republic of China on
Sino-foreign Joint Equity Enterprises", the "Law of the People's
Republic of China on Sino-foreign Cooperative Enterprise," and the "Law
of the People's Republic of China on Wholly-Foreign Owned Enterprises"
guarantee the legal rights of the investors in various forms. These laws
are discussed in more detail in the *Laws and Regulations* chapter,
above.

A "coalbed methane exploration and development" project is a project to
develop coalbed methane resources on a large scale, using two investment
forms: Chinese-foreign cooperation, and independent foreign investment.
However, for "comprehensive development and utilization of coal mine
associated resources" projects, because coalbed methane is developed
within the area where exploration and mining rights have already been
obtained, foreign investors can only adopt the forms of Chinese-foreign
cooperation and Chinese-foreign joint venture, according to the
principle of exclusive exploration and mining rights.

### 9.3 Standard Contracts for CBM International Cooperation

The standard contract for the exploitation of CBM resources in
cooperation with foreign companies is the contract model designed to
meet the requirements of cooperatively developing China's CBM resources
and open bidding issues. This contract is based on China's oil
international cooperation model and addresses the specific
characteristics of China's CBM development. It was designed based on a
series of related legislative documents for cooperative exploitation of
China's CBM resources and provides the basis for specific contract
versions.

A detailed contract for CBM cooperation is signed through bilateral
negotiations among the Chinese and the foreign investors based on
clauses in the standard contract with China United CBM Co. A
supplementary agreement for CBM development is signed when a commercial
discovery has been made and the two parties decide to begin development.

#### 9.3.1 Key Content of the Standard Contract

The standard contract in China for CBM has 29 main clauses and four
related annexes. Some of the important topics in the standard contract
are as follows:

-   Participating interest and obligations of cooperative parties

-   Management in the course of exploration, development, and production
    operations

-   The terms of economy and legal issues

The annexes refer to necessary procedures or regulations. The key issue
is its economic sharing model, as follows.

#### 9.3.2 Economic Sharing Model of the Standard Contract

(1) The foreign company undertakes the exploration risk solely, namely
    the foreign company undertakes all the exploration investment, and
    the foreign company should agree to the minimum compulsory
    exploration work and the minimum exploration expenditure. The amount
    of the compulsory work is an important condition of bidding
    competition among foreign companies. If no commercial coalbed
    methane field is found, the Chinese party does not have the
    obligation to compensate the exploration expenditure of the foreign
    company.

(2) After a commercial coalbed methane field is found, the Chinese party
    will participate in the development with an investment share not
    greater than 51%; the investment share of the foreign party is 49%.
    If the investment share of the Chinese party is less than 51%, the
    foreign party can increase its investment share accordingly, but the
    investment share of the Chinese party shall be not less than 30%.

(3) Coalbed methane recovered (sales revenue) shall be allocated in
    proper order. That is to say, a certain proportion of the total
    coalbed methane production is taken to pay the value-added tax at a
    rate of 5% to the Chinese government, pay the royalty according to
    the annual coalbed methane production, and then reimburse the
    operation costs of the two parties, in the end reimburse the
    exploration and development expenditure. If the total investment and
    the interest of the two parties cannot be returned fully when the
    contract is terminated, it can be treated as a loss of the two
    parties, and will not be returned.

(4) The surplus gas, namely the annual total production minus that paid
    for value-added tax, royalty, operating costs, and norm of
    investment return, is shared by the two parties. The surplus gas can
    be divided into two parts: "reserved gas of the Chinese party" and
    "Sharing gas" allocated to the two parties according to their
    commitment to the development investment. The relative proportion of
    the two parts is also an important condition in bidding competition
    among foreign petroleum companies, and is determined by contract
    negotiation.

**Further Details of the Standard Contract Economic Sharing Model**

(1) Value Added Tax (VAT) shall be 5% in kind for CBM cooperative
    projects. VAT shall be 13% for CBM projects self-financed by Chinese
    at the beginning with 8% returned later, resulting in an actual VAT
    of 5%.

(2) Royalties shall be imposed and calculated on the basis of gross CBM
    production in each calendar year for each CBM field (see Tables 9-1
    and 9-2).

**Table 9-1 Royalty Rates for CBM Cooperation Projects in Three
Provinces and**

**Regions of Qinghai, Xizang, Xinjiang, and Shallow Sea Region**

+---------------------------------------+------------------------------+
| **Annual Gross CBM Production (×      | > **Rates (%)**              |
| 10^8^m^3^)**                          |                              |
+---------------------------------------+------------------------------+
| Equal to or less than 20              | 0                            |
+---------------------------------------+------------------------------+
| 20 to 35                              | 1                            |
+---------------------------------------+------------------------------+
| 35 to 50                              | 2                            |
+---------------------------------------+------------------------------+
| Over 50                               | 3                            |
+---------------------------------------+------------------------------+

**Table 9-2 Royalty Rates for CBM Cooperation Projects**

**in Other Provinces, Autonomous Regions, and Cities**

  --------------------------------------- -------------------------------
  **Annual Gross CBM Production           **Rates (%)**
  (×10^8^m^3^)**                          

  Equal to or less than 10                0

  10 to 25                                1

  25 to 50                                2

  Over 50                                 3
  --------------------------------------- -------------------------------

(3) Seventy percent of the annual gross production of CBM shall be
    deemed as "cost recovery CBM". The sequence of its payment or
    recovery is as follows:

-   When the price is determined, payment for operating costs actually
    incurred by both parties shall be recovered first.

-   The remainder shall be deemed as "investment recovery CBM."
    Exploration costs shall be recovered first, then the development
    costs and interest.

-   After the recovery of the investment, the remainder shall be deemed
    as "remainder CBM" to be shared by both parties.

\(4\) The remainder of the CBM shall be divided into two parts: one part
as "share CBM", the other part as "allocable remainder CBM". The parties
in proportion to their actual respective participating interests
adjusted by a factor, X, shall allocate the "allocable remainder CBM".
The method for calculating X is the same as that of calculating royalty,
but the rate differs. Factor X is determined by negotiations.

#### 9.3.3 Standard Contract Terms

(1) Contract Area: surface area with geographic coordinates for the
    cooperative exploitation of CBM resources designated by the host
    government

(2) Contract Term: exploration, development, and production phases

(3) Minimum Exploration Work Commitment: minimum exploration work or
    other work commitments that shall be performed or financed by the
    foreign company

(4) Economic Benefit: measure of obtaining benefits through cooperation
    by the state company and foreign company

(5) Investment Recovery: generally a certain percentage to be recovered
    in the annual gross CBM production

(6) CBM Price, including quality, quantity. The price is in term of FOB.

(7) Taxation

(8) Preference for the Employment of Chinese Personnel, Goods, and
    Services

(9) Training of Chinese Personnel and Transfer of Technology

\(10\) Ownership of Assets and Data

\(11\) Solutions to the Disputes

\(12\) Other Content

### 9.4 Current Active Standard Contracts

In 1997 the Ministry of Foreign Trade and Economic Cooperation approved
the standard CBM production-sharing contract. The contract term is
usually 30 years, which includes exploration, development, and
production phases. On January 8, 1998, the first CBM production-sharing
contract for the exploitation of CBM resources in Huaibei, Anhui
Province, was signed between China United CBM Corp. Ltd. (CUCBM) and
Texaco China B.V. By January 2001, CUCBM has entered into eleven
production-sharing contracts respectively with six foreign companies
(see Table 9-3).

### 9.5 Preferable Model for Coal Mine Methane (CMM) International Cooperation

One obvious characteristic of coal mine methane (CMM) development is
that it must coordinate and harmonize with coal exploitation. A CMM
development project will inevitably need the participation of existing
coal enterprises and will benefit coal production. Therefore, to ensure
the smooth implementation of the projects, all involved enterprises
shall actively cooperate and coordinate with each other and ensure
rational mechanisms for benefit allocation and risk sharing.

The joint operating model is the preferable model for projects of
underground development and utilization of coal mine methane resources
in China. The benefiting parties shall jointly invest and construct CMM
development and utilization projects. The parties shall bear part of the
investment. A coal gas energy saving project in Yangquan mainly utilizes
CMM drained by the Yangquan Coal Group Company. The project supplies gas
to the residents in the urban district of Yangquan and the households of
employees of the coal mines. The project is jointly constructed by
Yangquan and the Yangquan Coal Group Company. A CMM utilization project
in Tiefa uses a similar cooperative model; the difference is that the
Japanese government has funded part of the Tiefa project.

Table 9-3 International Cooperation Projects with CUCBM

+---+------------+----------+---------+----------+-------------------+
|   | *          | **Lo     | **C     | **CBM    | **Fulfilled Work  |
|   | *Partner** | cation** | ontract | Res      | Commitment (by    |
|   |            |          | A       | ources** | the year 2000)**  |
|   |            |          | rea（km |          |                   |
|   |            |          | ^2^）** | **       |                   |
|   |            |          |         | （×10^8^ |                   |
|   |            |          |         | m^3^）** |                   |
+---+------------+----------+---------+----------+-------------------+
| 1 | Texaco     | Huaibei  | 2662    | 600      | 7 wells drilled   |
+---+------------+----------+---------+----------+-------------------+
| 2 | Phillips   | Linxing  | 3324    | 3000     | 12 wells drilled, |
|   |            |          |         |          | 5 wells fractured |
|   |            |          |         |          | and produced,     |
|   |            |          |         |          | 142.8 km seismic  |
|   |            |          |         |          | line completed    |
+---+------------+----------+---------+----------+-------------------+
| 3 | Arco       | Sanjiao  | 5215    | 2940     | 22 wells drilled, |
|   |            |          |         |          | 15 wells          |
|   |            |          |         |          | fractured and     |
|   |            |          |         |          | produced.         |
+---+------------+----------+---------+----------+-------------------+
| 4 | Arco       | North    |         |          |                   |
|   |            | Sanjiao  |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 5 | Arco       | Shilou   |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 6 | Greka      | F        | 1540    | 371      | 5 wells to be     |
|   |            | engcheng |         |          | drilled           |
+---+------------+----------+---------+----------+-------------------+
| 7 | Lowell     | Liulin   | 198     | 300      | 6 wells drilled,  |
|   |            |          |         |          | 4 wells fractured |
+---+------------+----------+---------+----------+-------------------+
| 8 | Texaco     | Zhungeer | 6897    | 10000    |                   |
+---+------------+----------+---------+----------+-------------------+
| 9 | Texaco     | Shenfu   |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 1 | Texaco     | Baode    |         |          |                   |
| 0 |            |          |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 1 | Virgin     | Hen      | 1708    | 230      |                   |
| 1 |            | gshanbao |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 1 | Far East   | Guizhou  | 1072.3  | 1400     |                   |
| 2 | Energy     |          |         |          |                   |
+---+------------+----------+---------+----------+-------------------+
| 1 | Ame        | Jincheng | 150.8   | 280      |                   |
| 3 | rica-China |          |         |          |                   |
|   | Energy     |          |         |          |                   |
+---+------------+----------+---------+----------+-------------------+

Cooperating parties may consider adopting the method for a CMM fired
power generation project, and the issue of power transportation and
distribution shall be solved cooperatively with the power company.

Other models, such as leasing facilities and purchasing types, should be
considered for future CMM utilization projects in coal mines. The
leasing facilities model is set up so that the facility suppliers
provide in advance related facilities to the customers and recover this
investment from the project's income. The purchasing model means a
drilling company and the owner's company agree that the drilling company
will provide the drilling cost. When gas production reaches the level
recognized by both parties, the owner will purchase the wells from the
drilling company. Otherwise, the owner will only provide a certain
amount of subsidy. The Fushun Mineral Group Company and the Northeast
China Geological Bureau have adopted this model.

# PART 4 USEFUL REFERENCE INFORMATION

## Key Contacts in China CMM/CBM Development

There are three types of Chinese organizations and institutions that
perform CBM consultation and R&D activities:

-   Organizations and institutions involved in CBM development, R&D, and
    consultation

-   Construction entities

-   Institutions for testing, lab tests, and CBM reservoir simulation

## Organizations and Institutions Involved in CBM Development, R&D, and Consultation

**1) China United CBM Co., Ltd. (CUCBM)**

**Address :** 88A, Anwai Dajie, Beijing 100011, P .R. China

**Tel.** (010) 64298288

**Fax.** (010) 64298388

**E-mail:** duming@chinacbm.com

CUCBM was founded in 1996 with the approval of the State Council of P.
R. of China. The company has a general meeting of shareholders, a board
of directors, and a board of supervision.

The business goals are: exploration, development, and production of CBM
in China; pipeline construction, CBM transportation, processing,
utilization, and marketing.

After China\'s CBM resources and key target area projects are evaluated,
sources will be pooled to focus on new energy development. Appropriate
projects will be selected and a specialized CBM R&D and management
system will be implemented. The State Council authorized the CUCBM,
through cooperation with foreign firms, to have the monopoly rights
concerning CBM exploration, development, and production. CUCBM is
responsible for relevant tendering, negotiating, contract signing, and
implementation once the appropriate state authorities approve a target
block.

**2) CBM Exploration Project Management Department of China National
Petroleum Corporation (CBM Project Management Department)**

**Address:** P.O. Box 44, Langfang 065007, Hebei, P.R. China

**Tel.** (010) 62095017, Ext. 3277

**Fax.** (010) 62095017, Ext. 3414

The CBM Project Management Department was established in 1994 under the
New Area Development Division of the Exploration Bureau of the China
National Petroleum Corporation. Its main tasks are to identify the
natural gas reserves for the Chinese oil sector and to gain technical
experience in CBM exploration and development. Once the target areas are
evaluated, it will conduct tendering, bid evaluating, contract signing,
and managing the construction projects.

**3) China Coalbed Methane Clearinghouse**

**Address:** 35, Shaoyaoju, Chaoyang District, Beijing 100029, P. R.
China

**Tel. & Fax.** (010) 84657948

**E-mail:** <cbmc@public.bta.net.cn>

**Website: http://www.coalinfo.net.cn/coalbed/coalbed.htm**

The China CBM Clearinghouse was set up in August 1994 with financial
support from the U.S. EPA. Its responsibility is the collection of
comprehensive CBM information from both China and abroad. The
Clearinghouse also provides CBM information consultation services to
governments, foreign firms, and the relevant sectors in China. The
Clearinghouse also sponsors technical seminars, workshops, etc.

**4) Methane Research & Development Center, Institute of Resources and
Environmental Sciences, China University of Mining and Technology**

**Address:** Xuzhou, Jiangsu 221008,P.R. China

**Tel.** (0516) 3885638

**Fax.** (0516) 3888682

**5) Northeast China Coal Geology Bureau, China Coal Geology
Administration**

**Address:** 24, Shengjing Road, Shenhe District, Shenyang 110011, P.R.
China

**Tel.** (024) 24111156

**Fax.** (024) 24111541

The Northeast China Coal Geology Bureau is responsible for evaluation of
the coalfield resources and CBM research in Liaoning, Jilin, and
Heilongjiang provinces and the four eastern prefectures of the Inner
Mongolia Autonomous Region. The Bureau previously performed CBM
exploration in Fuxin, Hongyang Shengang, and other areas. It developed
an experimental well group in the Daxing coal mine in the Tiefa
coalfield in Liaoning. Of the three wells completed, the TD-3 well began
experimental extraction in April 1997.

**6) Xi\'an Branch of China Coal Research Institute**

**Address:** 44, Yanta Road, Xi\'an City, Shaanxi 710054, P.R. China

**Tel.** (029) 7858567

> **Fax.** (029) 7850504

Xi\'an Branch of China Coal Research Institute is responsible for
research and development of new methods and new technologies for coal
geological exploration.

**7) Fushun Branch of China Coal Research Institute**

**Address:** 10, Dandong Road, West Section, Wanghua District, Fushun
113001, Liaoning, P. R. China

**Tel.** (0413) 6883260

**Fax.** (0413) 6883260

The Fushun Branch of China Coal Research Institute is one of the
organizations authorized for the resource assessment of mine gas
development and utilization. Its business scope includes R&D on CBM
extraction and utilization technology

**8) Chongqing Branch of China Coal Research Institute**

**Address:** Shangqiao, Shapingba District, Chongqing 630073, P.R. China

**Tel.** (023) 65239214,65239213

**Fax.** (023) 65236888

The business goals of the Chongqing Branch of China Coal Research
Institute are technology development and research on coal mine CBM
extraction, ventilation, and fire prevention/fighting. The design and
installation of an underground CBM extraction monitoring system were
completed for the Songzao Sub-project of the UN project \"China CBM
Resources Development\". The Chongqing Branch is one of the authorized
organizations for the resource assessment of mine gas development and
utilization.

## Construction Entities

**1) Zhongyuan Oil Exploration Bureau**

**Address:** Zhongyuan Road, Puyang City, Henan, P.R. China

**Tel.** (0393) 4824821

###### Fax. (0393) 4823164

**2) Dagang Oil Field CBM Co., Ltd.**

**Address: Dagang** Oil Field Group Co. Dagang District, Tianjin 300280,
P.R. China

**Tel.** (022) 25914946

**3) CBM Business Management Department, Northern China Bureau of
Petroleum Geology, China Xinxing Petroleum Company**

***Address:** 197, Funiu Road, Zhengzhou City, Henan, P. R. China*

**Tel.** (0371) **8880870** and 8610780

**Fax.** (0371) 8982902

**4) CBM Service Co., Liaohe Petroleum Exploration Bureau**

**Address:** Panjin, Liaoning Province, P.R. China

####### **Tel.** (0427) 7823403

## Institutions for Testing, Lab Tests, and CBM Reservoir Simulation

**1) Xi\'an Branch of China Coal Research Institute CBM Research &
Development Center**

**Address:** 44, Yanta Road, Xi\'an City, Shaanxi 710054, P.R. China

**Tel.** (029) **7858567**

**Fax.** (029) 7850504

The business scope of the Xi\'an Branch of China Coal Research Institute
CBM Research & Development Center includes the following:

-   Laboratory testing, CBM desorption, high-pressure isothermal
    adsorption, research on coal fracture and fissures, coal maceral
    analysis and testing (reflectance), and coal chemistry

-   Field testing: mud logging and injection /pressure drop logging

-   Resources evaluation: resources evaluation and favorable block
    selection; CBM project feasibility study and economic evaluation

-   Technological Development: development engineering design and single
    well design, drilling technical services and drilling fluids
    development research, hydro-fracturing design, water discharge/ gas
    extraction technology and production management system, centralized
    distribution system design

**2) CBM Exploration & Development Institute, No. l Geological Survey
Bureau of China Coal Geological Administration**

**Address:** **137**, Fuhe Beidajie, Handan City, Hebei, P.R. China

**Tel.** (0310) 7025544 and (0310) 7020914, Ext. 8162

**Fax.** (0310) 7025544,

The Institute has equipments for testing, lab tests, and reservoir
simulation. CBM special software was obtained through technical
introduction and some study reports were completed by the Institute.

### Appendix 1 Regulations for Registering to Explore for Mineral Resources Using the Block System 

12 February, 1998

*Article 1*

These Regulations are formulated, in accordance with the Mineral
Resources Law of the People\'s Republic of China, in an effort to
strengthen the administration of mineral resources exploration,
safeguard the lawful rights and interests of exploration licensees,
maintain the exploration order, and promote the wise development of the
mining industry.

*Article 2*

These Regulations shall be observed in exploring for mineral resources
within the territory of the People\'s Republic of China and other sea
areas under its jurisdiction.

*Article 3*

In determining the mineral resources areas for exploration, the State
shall adopt a Unified Block Registration System, based on a grid pattern
in which the basic unit block is longitude 1' × latitude 1'. The largest
area to be explored for each exploration project is as follows:

1\) 10 basic unit blocks for mineral water;

2\) 40 basic unit blocks for metal, non - metal, and radio - active
minerals;

3\) 200 basic unit blocks for geo - thermal resources, coal, and vapor
minerals; and

4\) 2500 basic unit blocks for petroleum and gas.

*Article 4*

Prior to exploring for mineral resources, each exploration project shall
be examined, approved, registered, and licensed by the department in
charge of geology and mineral resources under the State Council. This
includes:

1\) Those mineral resources that straddle two or more administrative
areas of different provinces, autonomous regions and municipalities
directly under the Central Government;

2\) Those mineral resources in the territorial sea or other marine areas
under China\'s jurisdiction.

3\) Those mineral resources explored for by foreign investment; and

4\) Those mineral resources listed in the Appendix attached to these
Regulations.

Each project exploring for petroleum and/or gas shall be examined and
approved by the organization designated by the State Council, and
registered and licensed by the department in charge of geology and
mineral resources under the State Council.

Prior to exploring for mineral resources, each exploration project shall
be examined, approved, registered, and licensed by the department under
the people\'s government of provinces, autonomous regions and
municipalities directly under the Central Government. The exploration
license shall be recorded with the department in charge of geology and
mineral resources under the State Council within 10 days, starting from
the date of issuance of such license. This includes:

1\) the mineral resources beyond the prescriptions of paragraph 1 and 2
of this Article;

2\) the mineral resources for which the examination and approval is
authorized by the department in charge of geology and mineral resources
under the State Council. The examination and approval shall be conducted
by the department in charge of geology and mineral resources under the
people\'s government of provinces, autonomous regions and municipalities
directly under the Central Government.

*Article 5*

The exploration investor shall be the exploration rights applicant. If
the investor is the State, the exploration unit entrusted by the State
shall be the exploration rights applicant.

*Article 6*

In applying for exploration rights, the applicant shall present the
following materials to the licensing authorities:

1\) an application form for registration and a drawing or map showing
the scope of the blocks for which the applicant is applying;

2\) a copy of a certificate validating the qualifications of the
exploration unit;

3\) an exploration working plan and an exploration contract or documents
of proof indicating that the exploration unit and project are entrusted
by the State;

4\) an implementation proposal for the exploration and a relevant
appendix;

5\) documents of proof showing the source of the funds for the
exploration project, and

6\) materials otherwise specified by the department in charge of geology
and mineral resources under the State Council.

If applying for a license to explore for petroleum and/or gas, the
applicant shall also present the document of the State Council approving
the establishment of a petroleum company or the document permitting the
exploration for petroleum and/or gas, and a Legal Person Certificate of
the exploration unit.

*Article 7*

In order to receive a license for on - going exploration and operation
of petroleum and/or gas, the applicant shall present the following
materials to the licensing authorities:

1\) an application form for registration and a drawing or map showing
the mining area for on - going exploration and operation;

2\) a project proposal approved by the department in charge of planning
under the State Council;

3\) materials of proof showing the necessity of on - going exploration
and operation;

4\) a mineral reserves report used for the purpose of on - going
exploration and operation and approved by the mineral reserves approving
agency under the State Council, and

5\) a utilization plan for on - going exploration and operation.

*Article 8*

The licensing authorities shall consider each application on a first
come, first serve basis, and either grant or deny the application within
40 days of receipt. Each applicant shall be notified as to the decision.
If there is an application for exploration for petroleum and/or gas, the
licensing authorities shall also make public announcement with regard to
the application or make the application available for public inquiring.

The licensing authorities shall give priority to any exploration project
listed in the first category of the National Geological Exploration
Plan. The detailed stipulations shall be formulated by the department in
charge of geology and mineral resources under the State Council, jointly
with the department in charge of planning under the State Council.

If it is necessary for the exploration - rights applicant to amend or to
add to the materials provided in Article 6 of these Regulations, the
licensing authorities shall notify the exploration - rights applicant
that they shall amend or add to the materials within the prescribed time
limit.

If the explorations project is approved, the exploration - rights
applicant shall, within 30 days from the date of the receipt of the
notice, pay a fee for the use of the exploration rights (hereafter
referred to as the exploration fee) in accordance with the provisions of
Article l2 of these Regulations.

If the Central Government has already invested in the designated
exploration area, the applicant shall be assessed a reimbursement fee
for exploration right to be paid in accordance with the provisions of
Article 13 of these Regulations.

Upon approval, the applicant is obligated to complete the exploration
registration procedures and obtain the exploration license before
becoming an exploration licensee.

If the exploration project is not approved, the licensing authorities
shall give an explanation to the applicant at the time of notification.

*Article 9*

No unit or individual may enter into or carry out exploration or mining
activities in areas already licensed to other exploration or mining
projects in accordance with law.

If a dispute occurs between exploration licensees and mining
concessioners, concerning the rights to exploration or mining areas,
such a dispute shall be settled through consultation by the parties
involved. If the consultation fails, such a dispute shall be adjudicated
by the licensing authorities of the higher level concerned.

*Article 10*

Generally an exploration license is valid for no more than 3 years.

However, the exploration license for petroleum and/or gas is valid for
up to 7 years. If there is a need to extend the time for exploration,
within 30 days prior to the expiration of the exploration license, the
exploration licensee shall file for an extension of the license with the
licensing authorities. Extension of the exploration license shall not
exceed two years each time.

If an exploration licensee fails to apply for an extension within the
designated time limit, the exploration license shall be forfeited.

Typically, a mining license for on - going exploration and operation for
petroleum and/or gas is valid for no more than 15 years. Once the
mineral reserves have been verified, the potential concessioner is
obligated to apply for the actual mining license.

*Article 11*

Within 10 days from the issuance of the exploration license, the
licensing authorities shall notify the department responsible for
geology and mineral resources under the people\'s governmental the
county level where the proposed exploration project is located. The
following information shall be conveyed:

1\) the name of the newly registered and licensed exploration project;

2\) the name of the exploration licensee;

3\) the scope of the blocks; and

4\) verification of the exploration license.

The licensing authorities shall periodically give public notice
announcing the newly licensed exploration areas.

*Article 12*

The State shall adopt a unified system in which the exploration rights
shall be paid for by the licensee with an exploration fee. These
exploration fees shall be calculated and paid on an annual basis.

The standard for the exploration fee is applicable to all licensees and
reads as follows:

-100 RMB yuan per square kilometer per year for the first three years;

-100 RMB yuan per square kilometer shall be added per year starting from
the fourth year.

However, the highest amount shall not exceed 500 RMB yuan per square
kilometer per year.

*Article 13*

If anyone applies for exploration rights to any blocks containing
mineral deposits discovered by the State, at the State\'s expense, the
applicant shall pay a reimbursement fee for exploration right based on
the State\'s prior investment, in addition to the exploration fee.

The reimbursement fee for exploration right may be paid in full or in
installments in compliance with the state provisions.

The reimbursement fee for exploration right will be based on costs
incurred by the State as appraised by the organizations designated by
the department of geology and mineral resources under the State Council,
jointly with the department in charge of state - owned assets under the
State Council. The results of the appraisal shall be confirmed by the
department in charge of geology and mineral resources under the State
Council.

*Article 14*

The exploration fee and the reimbursement fee for exploration right
shall be collected by the licensing authorities and delivered to the
State budget administration. The detailed specifications for managing
the funds mentioned above shall be formulated by the department in
charge of geology and mineral resources under the State Council jointly
with the department in charge of finance under the State Council and the
department in charge of planning under the State Council.

*Article 15*

Under following circumstances, the exploration fee or reimbursement fee
for exploration right may be reduced or exempted:

1)minerals whose exploration is encouraged by the State;

2)areas where exploration is encouraged by the State;

3)other situations jointly specified by the department in charge of
geology and mineral resources under the State Council and the department
in charge of finance under the State Council.

If a project falls within these guidelines, the licensee may apply for a
reduction or exemption of their exploration fee and/or reimbursement fee
for exploration right. Such applications shall be examined and approved
by the licensing authorities in accordance with the provisions governing
reductions and exemptions of the exploration fee and reimbursement fee
for exploration right, as formulated by the department in charge of
geology and mineral resources under the State Council, jointly with the
department in charge of finance under the State Council.

*Article 16*

Exploration rights may also be obtained through public bidding.

The licensing authorities may select bidding blocks, make public
invitation for bids, establish and announce the bidding requirements and
establish deadlines for the bids, in accordance with the limits of
authorities stipulated in Article 4 of these Regulations. However, the
bidding block available to foreign investors shall be determined by the
department in charge of geology and mineral resources under the State
Council.

The licensing authorities shall organize the evaluation of bids and
select the best offer. Upon acceptance of a bid, the successful bidder
shall pay the exploration fee and reimbursement fee for exploration
right in compliance with the provisions of Articles 12 and 13 of these
Regulations, complete the registration procedures, and obtain the
exploration license before becoming the exploration licensee, whereupon
they shall fulfill the obligations stipulated in the bid documents.

*Article 17*

The exploration licensee shall, from the date of issue of the
exploration license, meet a minimum expenditure for exploration
according to the following schedule:

1)2,000 RMB yuan per square kilometer for the first year of exploration;

2)5,000 RMB yuan per square kilometer for the second year of
exploration; and

3)10,000 RMB yuan per square kilometer each year thereafter, starting
with the third year of exploration.

If the exploration licensee\'s expenditure for any given year exceeds
the minimum stipulated for that year, the surplus may be applied to the
expenditure for the following year.

If the exploration work is interrupted due to force majeure such as
natural disaster or other unforeseen circumstances, the exploration
licensee may submit a report requesting that the minimum expenditure be
prorated accordingly. This report shall be submitted to the licensing
authorities within 30 days from the date on which the exploration work
is resumed. The licensing authorities shall give official and written
reply to the exploration licensee within 30 days of receipt of the
application report.

*Article 18*

The exploration licensee shall begin work within 6 months of the date of
issue of the exploration license. When starting the exploration work,
the exploration licensee shall report to the department responsible for
geology and mineral resources under the people\'s government at the
county level where the exploration project is located. They shall also
notify the licensing authorities as to the details of the commencement
of their work.

*Article 19*

Within the term of a valid exploration license, an exploration licensee
may apply for permission to mine mineral deposits only of the complex
type which the State has permitted the exploration licensee to mine.
After approval is granted by the licensing authorities, the mining
registration procedures shall be completed.

*Article 20*

If the exploration licensee needs to conduct experimental mining while
exploring for fluid minerals such as petroleum and/or gas, an
application for experimental mining shall be presented to the licensing
authorities by the exploration licensee. The experimental mining may be
conducted for 1 year upon approval. If there is a need to extend the
time of experimental mining, an actual mining license shall be obtained.

*Article 21*

After locating a deposit worth developing, the exploration licensee may,
within the term of a valid exploration license, discontinue the
expenditure for exploration and be relieved of the obligation to meet a
minimum expenditure requirement upon approval by the licensing
authorities. At this point, the exploration licensee may apply to
reserve the exploration rights to the ore bodies worth developing. This
shall be done within 30 days prior to the exploration license. But there
are exceptions to the above rules under the following situations:

1)the need to defer the present development of the deposit found is in
the public interest;

2)the present technical support is not available.

This reservation period shall not exceed 2 years. If there is a need to
extend this period of reservation, the applicant may apply 2 times for
an extension; each extension shall not exceed 2 years.

During this period when the minimum exploration requirements have been
discontinued and the rights to the ore bodies have been reserved , the
licensee shall continue to pay the exploration fee according to the
provisions of these Regulations.

The exploration license shall terminate at the close of the reservation
period.

*Article 22*

Within the term of a valid exploration license, an exploration licensee
shall apply to modify the registration with the licensing authorities
for the following reasons:

1\) to enlarge or reduce the scope of exploration blocks;

2\) to alter the target of exploration;

3\) to transfer the exploration rights approved in accordance with law;
or

4\) to change the name and/or address of an exploration licensee.

*Article 23*

Even if the registration for the exploration rights is extended or
modified , the exploration fee and the minimum expenditure requirements
shall continue as originally set forth.

*Article 24*

The following situations require further attention from the exploration
licensee:

1\) the licensee fails to renew the registration or fails to apply to
reserve the exploration rights;

2\) the licensee applies for mining rights;

3\) the licensee rescinds the exploration project for some reason.

If the licensee falls into any of the above categories within the period
of a valid license, he shall submit to the licensing authorities a
report on the completion or termination of the exploration project.
Forms for reporting the input of capital and relevant documents of proof
shall be submitted to the licensing authorities. After the input of
capital has been verified by the licensing authorities, the procedures
for terminating the exploration license shall be carried out.

If the original holder of a terminated license wishes to reapply to
explore for the same block, he shall wait for 90 days before he is
entitled to reapply.

*Article 25*

If the licensing authorities need to investigate the progress of the
exploration or any issues concerning the input of exploration capital,
the exploration licensee shall report swiftly and accurately with
relevant materials. Concealing relevant information or making false
declarations shall constitute a violation of these Regulations. The
investigation shall not be refused.

At the request of the exploration licensee, the licensing authorities
shall keep confidential any materials or information deemed sensitive by
the exploration licensee, including material submitted for the
registration application as well as materials concerning exploration
results and the financial report.

*Article 26*

If anyone violates the provisions set forth in these Regulations,
conducts any exploration without first obtaining an exploration license,
or conducts exploration beyond the approved limits of the exploration
blocks, the department responsible for geology and mineral resources
under the people\'s government at or above the county level shall be
responsible for ordering the concerned parties to stop the illegal
activities, giving warning , and may concurrently imposing a fine of up
to 100,000 RMB yuan.

*Article 27*

Anyone who violates the provisions set forth in these Regulations by
conducting, without approval, any on - going exploration and operation
for petroleum and/or gas, mining mineral resources of the complex type,
or experimental mining of any mineral resources , shall be ordered to
stop the illegal activities; the illegal gains shall be confiscated, and
a concurrent fine of up to 100,000 RMB yuan may be imposed. These
matters shall be handled by the department responsible for geology and
mineral resources under the people\'s government at or above the county
level in accordance with the limits of authorities prescribed by the
department in charge of geology and mineral resources under the State
Council.

*Article 28*

Anyone who prints exploration licenses without authorization,
counterfeits exploration licenses, or infringes in any way upon any
existing exploration licenses shall be in violation of the provisions of
these Regulations. Any illegal gains shall be confiscated and a
concurrent fine of up to 100,000 RMB yuan may be imposed by the
department responsible for geology and mineral resources under the
people\'s government at or above the county level. If the case
constitutes a crime, the personnel concerned shall be investigated for
criminal responsibility according to law.

*Article 29*

The following behaviors shall constitute violations of the provisions of
these Regulations:

1\) neglecting to put on record or report any circumstances relevant to
these Regulations, refusing to accept official examination or
supervision, or employing deception or trickery;

2\) failing to meet the minimum exploration expenditure requirements; or

3\) failing to begin construction on the exploration project within 6
months from the date of issue of the exploration license or halting the
work-in-progress for 6 consecutive months without valid reason.

These violations shall be ordered to be corrected within a prescribed
time limit by the department responsible for geology and mineral
resources under the people\'s government at or above the county level in
accordance with the limits of authorities prescribed by the department
in charge of geology and mineral resources under the State Council. If
the parties concerned fail to make the necessary corrections within the
prescribed time limit, a fine of up to 50,000 RMB yuan shall be imposed.
Should the licensee become obstreperous, the exploration license shall
be revoked by the department that originally issued the license.

*Article 30*

Any exploration licensee who violates the provisions set forth in these
Regulations by failing to comply with the procedures for modifying
and/or canceling the registration shall be ordered by the licensing
authorities to comply with these procedures within a prescribed time
limit. If the procedures have not been completed within the prescribed
time limit, the exploration license shall be revoked by the department
that originally issued the license.

*Article 31*

Any licensee who violates the provisions set forth in these Regulations
by failing to pay the required fees at the required time shall be
ordered by the licensing authorities to pay an overdue fine, in addition
to the amount due. The overdue fine shall be paid within a prescribed
time limit and shall be calculated at 2‰ per day on the amount in
arrears, counting from the date on which the fee becomes overdue. If the
fees required have not been paid within the prescribed time limit, the
exploration license shall be revoked by the department that originally
issued the license.

*Articl e32*

Any licensee who violates the provisions set forth in these Regulations
by exploring for petroleum and/or gas shall be given administrative
penalty by the department in charge of geology and mineral resources
under the State Council in accordance with the relevant stipulations.

*Article 33*

If an exploration license shall be revoked, the responsible exploration
licensee shall not re-apply for these or any other exploration rights
for 6 months from the date on which the exploration license was revoked.

*Article 34*

Any personnel with licensing authorities who act illegally, or abuse the
power for personal gains, or neglect their duties shall be investigated.
If the behavior constitutes a crime, they shall be held for criminal
responsibility according to law. If the case does not constitute a
crime, the personnel concerned shall be given administrative penalties.

*Article 35*

Exploration licenses shall be printed exclusively by the department in
charge of geology and mineral resources under the State Council. The
form of the application for registration, the application to modify a
registration, the application for reservation of exploration rights, and
the application for terminating a registration shall be exclusively
formulated by the department in charge of geology and mineral resources
under the State Council.

*Article 36*

Every licensee shall pay a registration fee in compliance with the
provisions. The standard for collecting these fees and specifications
for managing the use of these fees shall be determined by the department
in charge of price under the State Council, jointly with the department
in charge of geology and mineral resources under the State Council and
the department in charge of finance under the State Council.

*Article 37*

These Regulations shall be applied to any foreign investment in
exploring for mineral resources. If there are special stipulations
prescribed in other laws or administrative regulations governing foreign
investment in exploring for mineral resources, such stipulations shall
be given priority.

*Article 38*

If a Chinese exploration licensee wishes to include a foreign investor
in a mineral resources exploration project, the Chinese partner shall be
responsible for submitting the materials that describe the cooperative
effort, such as the scope of the exploration block, the minerals
involved, etc. The original licensing authorities shall review the
proposed cooperating project, make any restrictions or suggestions and
authorize the cooperative agreement, before any contract between the
cooperating parties shall be deemed valid. After the agreement has been
validated, the Chinese partner shall put the agreement on file with the
original licensing authorities.

*Article 39*

Any exploration license obtained before the implementation of these
Regulations shall be replaced by the new exploration license as
exclusively organized by the department in charge of geology and mineral
resources under the State Council. The exploration fee and minimum
exploration expenditure shall be rolled back to the first year, and
calculated and collected accordingly.

*Article 40*

Anyone who conducts a regional geological survey, a regional mineral
geological survey, or a regional geological survey involving
hydro-geology engineering geology or environmental geology shall notify
the licensing authorities as to their whereabouts and the nature of
their activities . This information shall be kept on file.

*Article 41*

The revision of the Appendix attached to these Regulations shall be
submitted to the State Council by the department in charge of geology
and mineral resources under the State Council. After the approval of the
revised Appendix is granted by the State Council, the department in
charge of geology and mineral resources under the State Council shall be
responsible for giving public notice regarding the revision.

*Article 42*

These Regulations shall be implemented from the date of promulgation and
shall replace the following publications, as of that date: the Interim
Measures on Registration for Mineral Exploration promulgated by the
State Council on April 29, 1987 and the Interim Measures on Registration
for the Exploration and Mining of Petroleum and Gas approved by the
State Council on 16 December, 1987 and promulgated by the Ministry of
Petroleum Industry on the same date.

### Appendix 2 The List of Minerals That Fall Under the Jurisdiction of the Department in Charge of Geology and Mineral Resources Under the State Council

  ----------------------- ------------------------ -----------------------
  l\. coal                13.chromium              24.molybdenum

  2.petroleum             14.cobalt                25.rare earths

  3.oil shale             15.iron                  26.phosphate

  4.natural gas           16.copper                27.potash

  5.carbon dioxide        17.1ead                  28.sulfur

  6.coalbed methane       18.zinc                  29.strontium

  7.geothermal resources  19.bauxite               30.diamond

  8.radioactive minerals  20.nickel                31.niobium

  9.gold                  21.tungsten              32.tantalum

  10.silver               22.tin                   33.asbestos

  11.platinum             23\. antimony            34.mineral water

  12.manganese                                     
  ----------------------- ------------------------ -----------------------

### Appendix 3 Regulations for Registering to Mine Mineral Resources

12 February,1998

*Article l*

These Regulations are formulated, in accordance with the Mineral
Resources Law of the People\'s Republic of China , in an effort to
strengthen the administration of mineral mining, safeguard the lawful
rights and interests of concessioners, maintain the mining order, and
promote the wise development of the mining industry.

*Article 2*

These Regulations shall be observed in mining mineral resources within
the territory of the People\'s Republic of China and other sea areas
under its jurisdiction.

*Article 3*

Prior to mining mineral resources, each mining project shall be
examined, approved, registered and licensed by the department in charge
of geology and mineral resources under the State Council. This includes:

1\) those mineral resources within state-planned mining areas or within
mining areas that are of great value to the national economy;

2\) those mineral resources in the territorial sea or other marine areas
under China\'s jurisdiction;

3\) mining by foreign investment for mineral resources; and

4\) those mineral resources in the Appendix attached to these
Regulations.

Mining projects for petroleum and/or gas shall be examined and approved
by the organization designated by the State Council, and then registered
and licensed by the department in charge of geology and mineral
resources under the State Council.

Prior to mining mineral resources, certain mining projects shall be
examined, approved, registered and licensed by the department in charge
of geology and mineral resources under the people\'s government of
provinces, autonomous regions and municipalities directly under the
Central Government. This includes:

\(1\) mining for mineral resources that beyond the prescription of the
first and second paragraphs of this Article and whose mineral reserves
is medium and plus scale;

\(2\) mining for certain mineral resources for which the examination,
approval and registration are conducted by the department in charge of
geology and mineral resources under the people\'s government of
provinces, autonomous regions and municipalities directly under the
Central Government . The power of examination and approval mentioned
above is authorized by the department in charge of geology and mineral
resources under the State Council.

Mining projects that are beyond the prescriptions of the first, second
and third paragraphs of this Article shall be examined, approved,
registered and licensed by the department in charge of geology and
mineral resources under the people\'s government at or above the county
level in accordance with the provisions formulated by the standing
committee of the people\'s congress of provinces, autonomous regions and
municipalities directly under the Central Government.

If the mining areas straddle two or more administrative areas at or
above the county level, mining for minerals within these areas shall be
examined, approved, registered and licensed by the licensing authorities
in common at next higher administrative level for the areas concerned.

Immediately upon the issuance of the mining licenses, the department
responsible for geology and mineral resources under the people\'s
government at or above the county level, shall file with the department
responsible for geology and mineral resources under the people\'s
government at the next higher level.

*Article 4*

Prior to submitting the application for mining rights, the mining-rights
applicant shall apply for demarcation of the mining area by the
licensing authorities. This demarcation shall be based on an approved
Geological Exploration Report containing mineral reserves information.

If there is a need to establish a mining enterprise or to apply to set
up a project, the relevant procedures shall be carried out in accordance
with the relevant provisions of the State based on the mining area
demarcated.

*Article 5*

In applying for a mining license, the mining-rights applicant shall
present the following materials to the licensing authorities:

1\) an application form for registration and a drawing or map showing
the mining areas;

2\) documents of proof showing the qualifications of the mining-rights
applicant;

3\) a development plan and a utilization proposal for the mineral
resources in the demarcating area;

4\) approval documents from the relevant departments, when establishing
certain mining enterprises that are governed by law;

5\) assessment report of the impact of mineral mining on environment;
and

6\) materials otherwise specified by the department in charge of geology
and mineral resources under the State Council.

When applying for mining mineral resources within a state-planned mining
area or within those mining areas which are of great value to the
national economy or mining specified minerals for which the protective
mining policy is prescribed by the State, the applicant shall present,
in addition, the approval documents issued by the relevant department
under the State Council.

If applying for mining petroleum and/or gas, the applicant shall
present, in addition, the document of the State Council approving the
establishment of a petroleum company or the document of the State
Council permitting the petroleum and/or gas mining, and the Mining
Enterprise Legal Person Certificate of the mining enterprise.

*Article 6*

The licensing authorities shall, within 40 days from the receipt of an
application for registration, grant or deny the application and notify
mining-rights applicant of the decision.

If it is necessary for the concessioner to amend or to add to the
materials provided in Article 5 of these Regulations, the licensing
authorities shall notify the mining-rights applicant and the materials
shall be amended within a prescribed time limit.

If the mining registration is approved, the mining-rights applicant
shall, within 30 days from the receipt of the notice, pay the
mining-rights use fee (heretofore referred to as the mining fee) in
compliance with the provisions of Article 9 of these Regulations. If
anyone applies for mining-rights in areas containing mineral deposits
discovered by the State, at the State\'s expense, the applicant shall
pay a mining fee in accordance with the provisions of Article 9 of these
Regulations. They shall also pay a reimbursement fee for mining right
based on the State\'s prior investment, in accordance with the
provisions of Article 10 of these Regulations. In addition, the
applicant shall carry out the mining registration procedures and obtain
the mining license before becoming the concessioner.

If the mining registration is not approved, the licensing authorities
shall give an explanation to the mining-rights applicant.

*Article 7*

The length of time for a valid mining license shall be decided in
accordance with the magnitude of the mining project. If the scope of the
project is large or plus, the mining license is valid for up to 30
years; for a project medium in scope, up to 20 years; for a project
small in scope, up to 10 years. If there is a need to extend the time
limit, the concessioner shall, within 30 days prior to the expiration of
the mining license, carry out the procedures regarding the extension of
the registration with the licensing authorities.

If the concessioner fails to carry out these procedures within the
designated time limit, the relevant mining licenses shall be
automatically terminated.

*Article 8*

After issuing the mining license, the licensing authorities shall notify
the relevant people\'s government at the county level where the mining
area is located. The relevant people\'s government at the county level
shall, within 90 days from the receipt of the notice, give public notice
of the newly licensed mining area, and may organize the posting of the
limits of the mining area or the installation of land markers at the
request of the concessioner.

*Article 9*

The State shall adopt a unified system in which the mining-rights shall
be paid for by the mining concessioner with a mining fee. The mining fee
shall be collected on a yearly basis based on the size of the mining
area.The standard of collection is 1,000RMB yuan per square kilometer
per year.

*Article 10*

If anyone applies for mining-rights to the mineral deposits already
discovered by the State, at the State\'s expense, the mining-rights
applicant shall pay , in addition to the mining fee, a reimbursement fee
for mining right which has been appraised and confirmed. The
reimbursement fee for mining right may be paid in full or in
installments, in compliance with the State provisions.

The reimbursement fee for mining right shall be appraised by the
organizations designated by the department in charge of geology and
mineral resources under the State Council, jointly with the department
in charge of state-owned assets under the State Council. The result of
appraisal shall be confirmed by the department in charge of geology and
mineral resources under the State Council.

*Article 11*

The mining fee and the reimbursement fee for mining right shall be
collected by the licensing authorities and delivered to the State budget
administration. The detailed specifications for managing the use of the
funds mentioned above shall be formulated by the department in charge of
geology and mineral resources under the State Council, jointly with the
department in charge of finance under the State Council and the
department in charge of planning under the State Council.

*Article l2*

Under one of the following circumstances, the mining fee and
reimbursement fee for mining right may be reduced or exempted:

1\) mining mineral resources in frontier and poor areas;

2\) mining mineral resources that are urgently needed by the State;

3\) a force majeure such as natural disaster, etc., causes a severe loss
or the suspension of production of the mining enterprise; or

> 4\) other situations jointly specified by the department in charge of
> geology and mineral resources under the State Council and the
> department in charge of finance under the State Council.
>
> If a project falls within these guidelines, the mining concessioner
> may apply for a reduction or exemption of the fees. Such applications
> shall be examined and approved by the licensing authorities in
> accordance with the provisions governing reductions and exemptions of
> the mining fee and reimbursement fee for mining right, as formulated
> by the department in charge of geology and mineral resources under the
> State Council, jointly with the department in charge of finance under
> the State Council.

*Article 13*

The mining rights may also be obtained through public bidding.

> The licensing authorities may select the mining areas for bid, make
> public invitation for bids, establish and announce bidding
> requirements and establish the deadlines for bids, in accordance with
> the limits of authorities stipulated in Article 3 of these
> Regulations. However, mining area open for bid by foreign investors
> shall be determines by the department in charge of geology and mineral
> resources under the State Council.
>
> The licensing authorities shall organize the evaluation of bids and
> select the best offer. The successful bidder shall pay the relevant
> fees in compliance with the provisions of these Regulations, carry out
> the registration procedures and obtain the mining license before
> becoming the concessioner, whereupon the concessioner shall fulfill
> the obligations stipulated in the bid documents.

*Article 14*

The licensing authorities shall conduct the supervision and
investigation of issues regarding rational development and utilization
of mineral resources, environmental protection and other obligations
that shall be fulfilled within the corresponding administrative areas in
accordance with law. The concessioners shall report any relevant
circumstances truthfully and submit an annual report.

*Article l5*

Under any of the following situations, the concessioner shall apply for
the modification of registration with the licensing authorities within
the valid term of the mining license:

1\) a change in the mining area;

2\) a change in the key minerals to be mined;

3\) a change in the mode of mining;

4\) a change in the name of the mining enterprise;

5\) a transfer of the mining rights upon approval in accordance with
law.

*Article l6*

If a mine is suspended or closed down within the term of a valid mining
license or upon the expiration of a mining license, the concessioner
shall apply for cancellation of the mining license with the licensing
authorities that originally issued such mining license within 30 days
prior to the decision to suspend or close down a mine.

*Article 17*

Any unit or individual who mines without a mining license, mines without
authorization in a State-planned mining area, mines without
authorization in a mining area that is of great value to the national
economy, mines without authorization specified minerals for which
protective mining policy is prescribed by the State, or mines beyond the
approved limits of mining areas, shall be punished by the licensing
authorities in accordance with the relevant laws and administrative
Regulations.

*Article 18*

Anyone who in violation of these Regulations, does not submit an annual
report, refuses to accept official supervision and examination, or
employs deception or trickery, shall be ordered to stop the illegal
activities, warned, and may be fined concurrently up to 50,000 RMB yuan
by the department responsible for geology and mineral resources under
the people\'s government at or above the county level in accordance with
the limits of authorities prescribed by the department in charge of
geology and mineral resources under the State Council. If the
circumstances are serious, the mining license shall be revoked by the
department that originally issued the license.

*Article 19*

Anyone who damages or moves without authorization any land markers or
posts demarcating the limits of a mining area shall be ordered to return
it to the original status within a time limit prescribed by the
department responsible for geology and mineral resources under the
people\'s government at or above the county level in accordance with the
limits of authorities prescribed by the department in charge of geology
and mineral resources under the State Council. If the circumstances are
serious, a fine of up to 30,000 RMB yuan shall be imposed.

*Article 20*

Anyone who prints a mining license without authorization, counterfeits a
mining license, infringes in any way upon any existing mining license
shall be in violation of the provisions of these Regulations. Any
illegal proceeds shall be confiscated and a concurrent fine of up to
100,000 RMB yuan may be imposed by the department responsible for
geology and mineral resources under the people\'s government at or above
the county level in accordance with the limits of authorities prescribed
by the department in charge of geology and mineral resources under the
State Council. If the case constitutes a crime, the personnel concerned
shall be investigated for criminal responsibility according to law.

*Article 2l*

Any concessioner who violates the provisions set forth in these
Regulations by failing to pay the required fees at the required time
shall be ordered by the licensing authorities to pay an overdue fine, in
addition to the amount due. The overdue fine shall be paid within a
prescribed time limit and shall be calculated at 2‰ per day on the
amount in arrears, counting from the date on which the payment becomes
overdue. If the fees required have not been paid within the prescribed
time limit, the mining license shall be revoked by the department that
originally issued the license.

*Article 22*

Any concessioner who violates the provisions set forth in these
Regulations by failing to comply with the procedures for modifying
and/or canceling a registration shall be ordered by the licensing
authorities to comply with these procedures within a prescribed time
limit. If the procedures have not been completed within the prescribed
time limit, the mining license shall be revoked by the department that
originally issued the license.

*Article 23*

Any concessioner who violates the provisions set forth in these
Regulations by mining petroleum and/or gas shall be given administrative
penalties by the department in charge of geology and mineral resources
under the State Council in accordance with the relevant stipulations.

*Article 24*

If a mining license is revoked, the responsible concessioner shall not
re-apply for these or any other mining rights for 2 years from the date
on which the mining license was revoked.

*Article 25*

Any personnel with licensing authorities who act illegally or abuse
their power for personal gains, or neglect their duties shall be
investigated. If the behavior constitutes a crime, the personnel
concerned shall be investigated for criminal responsibility according to
law. If the behavior does not constitute a crime, the personnel
concerned shall be given administrative penalties.

*Article 26*

Mining license shall be printed exclusively by the department in charge
of geology and mineral resources under the State Council. The form of
the application for registration, the application to modify a
registration, and the application for terminating a registration shall
be exclusively formulated by the department in charge of geology and
mineral resources under the State Council.

*Article 27*

Every concessioner shall pay a registration fee in compliance with the
provisions. The standard for collecting these fees and the
specifications for managing the use of these fees shall be determined by
the department in charge of price under the State Council, jointly with
the department in charge of geology and mineral resources under the
State Council and the department in charge of finance under the State
Council.

*Article 28*

These Regulations shall be applied to any foreign investor mining
mineral resources. If there are special stipulations prescribed in other
law or administrative regulations government foreign investment in
mining mineral resources, such stipulation shall be given priority.

*Article 29*

If a Chinese mining concessioner wishes to include a foreign investor in
a mineral resources mining project, the Chinese partner shall be
responsible for submitting the materials that describe the cooperative
effort, such as the size of mining area, and the minerals involved, as
well as proposals for development and utilization of the proposed
cooperation project, the original licensing authorities shall review the
proposed cooperative project, make any restriction or suggestions and
authorize the cooperative agreement, before any contract between the
cooperating parties shall be deemed valid. After the agreement has been
validated, the Chinese partner shall put the agreement on file with the
original licensing authorities.

*Article 30*

Any mining license that was obtained before the implementation of these
Regulations shall be replaced by the new mining license as exclusively
organized by the department in charge of geology and mineral resources
under the State Council.

The mining enterprise existed before the implementation of these
Regulations shall start to pay the mining fee as from the date of
promulgation of these Regulations. However, the concessioner may apply
for a reduction or exemption of this fee in accordance with these
Regulations.

*Article 31*

The licensing authorities shall give public notice of any mining license
that has been issued or abolished.

*Article 32*

The mining areas mentioned in these Regulations refer to a three
dimensional space including the land surface area where the mineral
resources can be mined, the vertical distribution of an above-ground or
underground pit engineering installation, or the surface area to be
removed by open stripping, as demarcated by the licensing authorities in
accordance with law.

The mode of mining mentioned in these Regulations refers to either
underground mining or open mining.

*Article 33*

The revision of the Appendix attached to these Regulations shall be
submitted to the State Council by the department in charge of geology
and mineral resources under the State Council. After the approval of the
revised Appendix is granted by the State Council, the department in
charge of geology and mineral resources under the State Council shall be
responsible for giving public notice regarding the revision.

*Article 34*

These Regulations shall be implemented from the date of promulgation and
shall replace the following publications, as of that date:

1\) Interim Measures for Administration of Mining Registration for Mine
Enterprises Owned by the Whole People issued by the State Council on 29
April, 1987, and

2\) Decision of the State Council Regarding the Revision of the Interim
Measures for administration of the Mining Registration for the Mining
Enterprises Owned by the Whole People, issued by the State Council on 22
November,1990.

### Appendix 4 Regulations for Transferring Exploration Rights and Mining Rights

**12 February, 1998**

*Article 1*

These Regulations are formulated in accordance with the Mineral Resource
Law of the People\'s Republic of China, in an effort to strengthen the
administration of the transfer of exploration rights and mining rights,
safeguard the lawful rights and interests of the exploration licensees
and concessioners and promote the wise development of the mining
industry.

*Article 2*

These Regulations shall be observed in the transfer of explorations and
mining rights that have been obtained in accordance with law within the
territory of the People\'s Republic of China and other sea areas under
its jurisdiction.

*Article 3*

Exploration rights and mining rights shall not be transferred except
under the following circumstances, subject to approval in accordance
with law:

1\) The exploration licensee has the right to carry out exploration
activities within the designated exploration areas and has the
privileged priority to obtain the mining rights to the mineral resources
in this exploration area. The exploration licensee may transfer the
exploration rights to others upon meeting the minimum exploration
expenditure requirements.

2\) A mining enterprise has already obtained the mining rights but needs
to change the ownership of these mining rights for a variety of reasons:

a\) the enterprise has been merged or split

b\) the enterprise enters into equity joint ventures or cooperative
joint ventures with others;

c\) the enterprise sells its enterprise assets; or

d\) other situations that will lead to the alteration of enterprise
property ownership.

*Article 4*

The transfer of exploration rights and mining rights shall be examined
and approved by the department in charge of geology and mineral
resources under the State Council and the department in charge of
geology and mineral resources under the people\'s government of
provinces, autonomous regions and municipalities directly under the
Central Government.

> The department in charge of geology and mineral resources under the
> State Council shall be responsible for the examination and approval of
> the transfer of exploration rights and mining rights that have been
> examined, approved and licensed by the department itself.
>
> The transfer of exploration rights and mining rights beyond the
> prescription of the second paragraph of this Article shall be examined
> and approved by the department in charge of geology and mineral
> resources under the people\'s government of provinces, autonomous
> regions and municipalities directly under the Central Government.

*Article 5*

Any exploration licensee who wishes to transfer the exploration rights
shall meet the following requirements:

1\) 2 years or more have passed since the date of issue of the
exploration license, or the mineral resources already located are worthy
of further exploration or mining;

2\) the minimum exploration expenditure requirements have been met;

3\) the licensee has undisputed ownership of the exploration rights;

4\) the exploration fee and any reimbursement fee for exploration right
have been paid in accordance with the provisions of the State; and

5\) other requirements otherwise specified by the department in charge
of geology and mineral resource under the State Council;

*Article 6*

Any mining concessioner who wishes to transfer mining rights shall meet
the following requirements:

1\) one year or more have passed since the mining enterprise began
mining;

2\) the mining concessioner has undisputed ownership of the mining
rights;

3\) the mining fee and any reimbursement fee for mining right, the
mineral resources compensation and resources tax have been paid in
accordance with relevant provisions of the State and

4\) other requirements specified by the department in charge of geology
and mineral resources under the State Council.

Any State-owned mining enterprise shall get consent from the department
in charge of that mining enterprise prior to the application for
transferring the mining rights.

*Article 7*

The assignee of the transfer of exploration rights and mining rights
shall meet the relevant requirements provided in Regulations for
Registering to explore for Mineral Resources Using the Block System and
Regulations for Registering to Mine Mineral Resources.

*Article 8*

The exploration licensee or mining concessioner shall present the
following materials to the licensing authorities when applying to
transfer exploration rights or mining rights:

1\) an application for transfer;

2\) a transfer contract signed by the transferor and assignee;

3\) documents of proof showing the qualifications of the assignee;

4\) documents of proof showing that the requirements provided in Article
5 and 6 of these Regulations have been met by the transferor;

5\) a report detailing the status of the exploration and/or mining
project; and

6\) the relevant materials otherwise specified by the examining and
approving agency.

If a state-owned enterprise wishes to transfer exploration rights and/or
mining rights, the approval documents issued by the relevant departments
shall also be presented to the licensing authorities.

*Article 9*

Any exploration rights and mining rights developed by the State, at the
State\'s expense shall be appraised before they are transferred.

The appraisal work concerning the transfer of exploration right and
mining right shall be conducted by the organizations designated by the
department in charge of geology and mineral resources under the State
Council, jointly with the department in charge of State - owned assets
under the State Council. The result of appraisal shall be confirmed by
the department in charge of geology and mineral resources under the
State Council.

*Article 10*

If anyone applies to transfer exploration rights or mining rights, the
examining and approving agency shall deny or approve the transfer within
40 days from receipt of the application for transfer, and notify the
transfer applicant and the potential assignee of the decision.

The transferor and the assignee shall, within 60 days from receipt of an
approval notice, modify the registration with the licensing authorities
that originally issued the corresponding licenses. The assignee shall
pay the relevant fees in compliance with the provisions of the State,
and obtain the exploration license or mining license before becoming the
exploration licensee or mining concessioner.

If a transfer is approved, the transfer contract shall take effect on
the date of approval,

If the transfer is denied, the examining and approving agency shall give
an explanation.

*Article 11*

After approving the transfer of the exploration rights or mining rights,
the examining and approving agency shall immediately inform the
licensing authorities that originally issued the respective licenses.

*Article 12*

The rights and obligations of the exploration licensees and mining
concessioners shall be transferred to the assignee upon the transfer of
the exploration rights and the mining rights.

*Article 13*

When exploration rights or mining rights are transferred, the assignee
shall assume whatever time remains on the original licenses.

*Article 14*

If any exploration licensee or mining concessioner transfers their
respective rights without approval of the relevant examining and
approving agency, the licensing authorities shall confiscate the illegal
proceeds and impose a fine of up to 100,000 RMB yuan. If the
circumstances are serious, the exploration license or mining license
shall be revoked by the department that originally issued the license.

*Article l5*

Anyone who, in violation of the provisions of Item 2 of Article 3 of
these Regulations, transfers the mining rights without authorization by
means of contracting, etc. shall be ordered to correct the illegal
transfer by the department responsible for geology and mineral resources
under the people\'s government at or above the county level in
accordance with the limits of authorities prescribed by the department
in charge of geology and mineral resources under the State Council. The
illegal gains shall be confiscated and a fine of up to 100,000 RMB yuan
shall be imposed. If the case is serious, the mining license shall be
revoked by the department that originally issued the license.

*Article 16*

Personnel employed by an examining and approving agency who act
illegally and abuse their power for personal gain or neglect their
duties shall be investigated. If the case constitutes a crime, they
shall be held for criminal responsibilities according to law. If the
case does not constitute a crime, the personnel concerned shall be given
administrative penalties.

*Article 17*

The actual form for the application for transfer of exploration rights
and mining rights shall be formulated exclusively by the department in
charge of geology and mineral resources under the State Council.

*Article l8*

These Regulations shall take effect as of the date of promulgation.

Appendix 5 Regulations of the People\'s Republic of China Concerning the
Exploitation of On-Shore Petroleum Resources in Cooperation with Foreign
Enterprises

7 October, 1993

> Chapter I General Provisions
>
> *Article 1*
>
> These Regulations are formulated in order to safeguard the development
> of the petroleum industry and to promote international economic
> cooperation and technical exchange.
>
> *Article 2*
>
> These Regulations must be observed in all activities involving foreign
> cooperative exploitation of on-shore petroleum resources in the
> People\'s Republic of China.
>
> *Article 3*

Ownership of the petroleum resources within the territory of the
People\'s Republic of China shall vest in the State of the People\'s
Republic of China.

*Article 4*

The Government of China protects according to law the cooperative
exploitation activities, investment, profit and other lawful rights and
interests of foreign enterprises participating in the cooperative
exploitation of on-shore petroleum resources.

Activities in the People\'s Republic of China involving the cooperative
exploitation of on-shore petroleum resources must comply with the
relevant laws, rules and regulations of the People\'s Republic of China
and shall be subject to supervision and control by the relevant
authorities of the Chinese Government.

*Article 5*

The State will not requisition the investment and gains of foreign
enterprises participating in the cooperative exploitation of on-shore
petroleum resources. In special circumstances, when the public interest
requires, part or all of the petroleum due to the foreign enterprises in
connection with cooperative exploitation may be requisitioned according
to legal procedures. In case of such requisitioning, appropriate
compensation shall be paid.

*Article 6*

A department or unit authorized by the State Council shall be
responsible for demarcating cooperation blocks, determining the forms of
cooperation, arranging for the formulation of relevant plans and
policies, and examining and approving overall development programs for
oil(gas) fields in cooperation with foreign enterprises, for the
cooperation areas approved by the State Council.

*Article 7*

China National Petroleum and Natural Gas Corporation shall be
responsible for business matters in respect of the exploitation of
on-shore petroleum resources in cooperation with foreign enterprises,
and for negotiating, entering into and implementing contracts for the
cooperative exploitation of on-shore petroleum resources with foreign
enterprises. China National Petroleum and Natural Gas Corporation shall
have the exclusive right to engage in petroleum exploration, development
and production in cooperation with foreign enterprises in areas approved
by the State Council for exploitation of on-shore petroleum resources in
cooperation with foreign enterprises.

*Article 8*

Following invitations to bid or negotiations, China National Petroleum
and Natural Gas Corporation shall enter into contracts with foreign
enterprises for the cooperative exploitation of on-shore petroleum
resources in the cooperation blocks demarcated in the areas approved by
the State Council for exploitation of on-shore petroleum resources in
cooperation with foreign enterprises. Such contracts shall be formed
only after they have been approved by the Ministry of Foreign Trade and
Economic Cooperation of the People\'s Republic of China.

In addition to the contracts referred in the preceding paragraph, China
National Petroleum and Natural Gas Corporation may also enter into other
cooperation contracts with foreign enterprises in respect of areas
approved by the State Council for cooperative exploration of on-shore
petroleum resources. Such contracts must be submitted to the Ministry of
Foreign Trade and Economic Cooperation of the People\'s Republic of
China for the record.

*Article 9*

After a block has been declared open to foreign cooperation, China
National Petroleum and Natural Gas Corporation may engage in cooperative
exploitation of on-shore petroleum resources with foreign enterprise(s)
and, other than that, no enterprise may enter such block to prospect for
petroleum or may enter into an economic and technical cooperation
agreement with foreign enterprise(s) for petroleum exploitation in such
block.

Any enterprise that has entered and is prospecting for petroleum (in the
area appraisal prospecting stage) in a block declared open to foreign
cooperation prior to the time such decoration has been made shall
withdraw from such block when China National Petroleum and Natural Gas
Corporation and the foreign enterprise have entered into a contract.
China National Petroleum and Natural Gas Corporation shall be
responsible for selling the prospecting data obtained by such
withdrawing enterprise, so as to compensate the enterprise for its
investment in an appropriate manner. After an oil(gas) field with
commercial exploitation value is discovered in such block, the
enterprise that withdraws from the block may participate in development
by investment.

A department or unit authorized by the State Council shall periodically
adjust the blocks which have been determined as open blocks based on the
circumstances of entry into and implementation of the contracts.

*Article 10*

In the exploitation of on-shore petroleum resources in the cooperation
with foreign enterprises, the principle of taking both central and local
interests into consideration shall be observed. Appropriate
consideration shall be given to local interests by methods such as
attracting funds from the place where an oil(gas) field with commercial
exploitation value is located for investment in the development of such
field.

The relevant local People\'s Government shall protect normal production
and business activities carried out in cooperation areas according to
law and shall render effective assistance in respect of land use, road
access and living amenities, etc.

*Article 11*

In the cooperative exploitation of on-shore petroleum resources, taxes
shall be paid according to law, in addition, royalties shall be paid.

Employees of enterprises engaged in the cooperative exploitation of
on-shore petroleum resources shall pay tax on their income according to
law.

*Article 12*

Duties and taxes on equipment and materials imported for purpose of
implementing contracts shall be reduced or exempted, or other
preferential treatment shall be granted in respect of such duties and
taxes, in accordance with relevant regulations of the State. The
measures shall be formulated by the Ministry of Finance in conjunction
with the General Administration of Customs.

Chapter II Rights and Obligations of Foreign Contractors

*Article 13*

To engage in the cooperative exploitation of on-shore resources, China
National Petroleum and Natural Gas Corporation and foreign enterprises
must conclude contracts. Unless laws, regulations or the contract
provide otherwise, the foreign enterprise entering into the contract
(hereinafter referred to as \"Foreign Contractor\") shall solely provide
the investment to carry out exploration, be responsible for the
exploration operations and bear all exploration risks. After the
discovery of as oil (gas) field with commercial exploitation value, the
Foreign Contractor and China National Petroleum and Natural Gas
Corporation shall jointly invest in cooperative development. The Foreign
Contractor shall undertake the development and production operations,
until production operation are taken over by China National Petroleum
and Natural Gas Corporation as stipulated in the contract.

*Article 14*

> Foreign Contractor may, in accordance with the provisions of the
> contract, recover their investment and expenses, and obtain
> remuneration out of the petroleum produced.

*Article 15*

> Foreign Contractor may transport the petroleum due to them and the
> petroleum purchased by them out the country, and they may also remit
> the investment recovered by them, their profits and their other lawful
> gains out of the country, in accordance with the relevant Regulations
> of the State and the provisions of the contracts.

If a Foreign Contractor sells the petroleum due to it within the
territory of the People\'s Republic of China, such petroleum shall be
purchased exclusively by China National Petroleum and Natural Gas
Corporation.

*Article 16*

Foreign Contractor shall open accounts with banks within the territory
of the People\'s Republic of China that have obtained approval to engage
in foreign exchange business, and shall abide by State Regulations on
foreign exchange control.

*Article 17*

Foreign Contractor shall establish branches or representative offices
within the territory of the People\'s Republic of China according to
law.

*Article 18*

In implementing the contracts, Foreign Contractor shall employ advanced
technology and management experience. In addition, they shall transfer
technology and pass on experience to Chinese personnel and train such
personnel.

In their petroleum operations, Foreign Contractors shall gradually
increase the ratio of Chinese personnel employed.

*Article 19*

In the course of implementing the contracts, Foreign Contractor shall
timely and accurately report on the petroleum operations to China
National Petroleum and Natural Gas Corporation, obtain compete and
accurate data, records, samples, vouchers and other original information
in respect of all petroleum operations, and submit information, samples
and various reports in respect of technical, economic, financial,
accounting and administrative aspects to China National Petroleum and
Natural Gas Corporation in accordance with Regulations.

*Article 20*

After a Foreign Contractor has been compensated for its investment in
accordance with the contract or after the production period of oil (gas)
field in question has expired, title to all assets purchased and
manufactured by the Foreign Contractor according to the plan and the
budget for implementation of the contracts, except for equipment leased
from third parties, shall vest in China National Petroleum and Natural
Gas Corporation. During the term of the contract, the Foreign Contractor
may use such assets in accordance with the contract.

> Chapter III Petroleum Operations

*Article 21*

> The operators must formulate overall development programs for oil(gas)
> fields in accordance with the Regulations of the State concerning the
> exploitation of petroleum resources, and shall carry out development
> and production operations after such programs have been approved by a
> department or unit authorized by the State Council.

*Article 22*

> Given equal conditions in and outside China, the operators shall to
> the extent possible give preference to purchase in China of the
> machinery, equipment, raw materials, accessories, means of
> transportation and office articles required for the petroleum
> operations.
>
> With respect to the personnel and subcontractors required for the
> petroleum operations, the operators shall give preference to the
> employment of Chinese citizens and subcontractors, as stipulated in
> the contracts.

*Article 23*

> In carrying out petroleum operations, operators and subcontractors
> shall observe State laws, Regulations and standards concerning
> environmental protection and operational safety, carry out their
> operations according to international practice, protect farmland,
> aquatic resources, forest reserves and other natural resources, and
> prevent pollution of and damage to the atmosphere, oceans, rivers,
> streams, lakes, groundwater and other land environments,

*Article 24*

The use of land in the course of petroleum operations shall be handled
in accordance with the law of the People\'s Republic of China on the
Administration of land and other relevant Regulations of the State.

*Article 25*

Title to all data, records, samples, vouchers and other original
information in respect of all petroleum operations as referred to in
Article 19 hereof shall vest in China National Petroleum and Natural Gas
Corporation.

The use, assignment, donation, exchange, sale, publication, and
transport or transmission out of the People\'s Republic of China, of
data, records, sample, vouchers and other original information as
mentioned in the preceding paragraph must be in accordance with the
relevant Regulations of the State.

Chapter IV Settlement of Disputes

*Article 26*

Any dispute between the parties to a contract for the cooperative
exploitation of on-shore petroleum resources that arises from the
implementation of the contract shall be resolved through consultations
or mediation. If the parties are not willing to resolve the dispute
through consultations or mediation, or if consultation or mediation is
unsuccessful, the dispute may be submitted for arbitration by a Chinese
arbitration institution or another arbitration institution in accordance
with the arbitration clause in the contract or a written arbitration
agreement entered into subsequently.

If the parties have neither included an arbitration clause in their
contract nor reached a subsequent written arbitration agreement,
proceedings may be instituted in a people\'s Court of China.

Chapter V Legal Liability

*Article 27*

> Anyone that violates these Regulations in any of the following ways
> may be warned and ordered to rectify the situation within a prescribed
> time limit by a department or unit authorized by the State Council
> and, if the situation is not rectified within the prescribed time
> limit, be ordered to cease petroleum operations; if the violation
> constitutes a criminal offense, criminal liability shall be pursued
> according to law.

1\) acting in violation of the first paragraph of Article 9 hereof by
entering without authorization a block opened to foreign cooperation to
prospect for petroleum or by signing without authorization a cooperation
agreement with a foreign enterprise for petroleum exploitation in a such
block;

2\) acting in violation of Article 19 hereof by, in the course of
implementing the contract, failing timely and accurately to report on
the petroleum operations to China National Petroleum and Natural Gas
Corporation or failing to submit information, samples and various
reports in respect of technical, economic, financial, accounting and
administrative aspects to China National Petroleum and Natural Gas
Corporation in accordance with Regulations;

3\) acting in violation of Article 21 hereof by carrying out development
and production operations on one\'s own authority without having
obtained approval for the overall development program for the oil(gas)
field; or

4\) acting in violation of the second paragraph of Article 25 hereof by
making unauthorized use of date, records, samples, vouchers or other
original information on petroleum operations, or by assigning, donating,
exchanging, selling, publishing the same without authorization, or by
transporting or transmitting the same out of the People\'s Republic of
China without authorization.

*Article 28*

Anyone that violates Articles 11, 16, 23 and 24 hereof shall be punished
by the relevant department-in-charge of the State in accordance with
relevant laws and Regulations. If the violation constitutes a criminal
offense, criminal liability shall be pursued according to law.

Chapter VI Supplementary Provisions

*Article 29*

For the purpose of these Regulations, the following terms shall have the
meanings assigned to them below:

1\) the term \"petroleum\" shall mean underground crude oil and natural
gas that is being or has been extracted;

2\) the term \"on-shore petroleum resources\" shall mean underground
petroleum resources anywhere within the on-shore area(including sea
beaches, islands and marine areas extending from the on-shore area up to
a water depth of 5 meters);

3\) the term \"exploitation\" shall mean the exploration for and the
development, production and sale of petroleum, as well as activities in
connection therewith;

4\) the term \"petroleum operations\" shall mean exploration,
development and production operations carried out in order to implement
a contract, as well as activities in connection therewith;

5\) the term \"exploration operations\" shall mean all work carried out
to find oil-bearing traps by various means such as geological,
geophysical and geochemical means, including the drilling of exploration
wells, as well as all work carried out to determine whether a discovered
petroleum trap has commercial value, such as the drilling of appraisal
wells, feasibility studies and preparation of overall development
programs for the oil(gas) field;

6\) the term \"development operations\" shall mean all designing,
manufacturing, installation and drilling projects, and the corresponding
research, carried out as from the date of approval of the overall
development program for the oil(gas) field for the purpose of realizing
petroleum production, including production activities carried out prior
to the commencement of commercial production;

7\) the term \"production operations\" shall mean all operations carried
out for the purpose of petroleum production as from the date of
commencement of the commercial production of an oil (gas) field as well
as all activities in connection therewith.

*Article 30*

Articles 4, 11, 12, 15, 16, 17and 22 hereof shall be applicable to
foreign subcontractors.

*Article 31*

These Regulations shall become effective on the date of promulgation.