China - A FTZ With A Focus On Establishing A Hub For Oil And Gas Value Chain.

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China - A FTZ With A Focus On Establishing A Hub For Oil And Gas Value Chain.

 

14 May 2020

 

Asia Pacific Legal Updates

 

Introduction

 

The Free Trade Zone concept was first introduced by the 1973 Kyoto Convention (International Convention on the Simplification and Harmonization of Customs Procedures 1973). The 1973 Kyoto Convention defines a Free Trade Zone as a specific district (within the customs territory of a sovereign country or region) that is designated to allow foreign goods to be imported and exported freely under tariff exemptions. The first Free Trade Pilot Zone (herein referred to as “Free Trade Zone”) was established in Shanghai Pudong on 29 September 2013. Since then, China has approved 18 Free Trade Zones which cover the main provinces, cities and ports including Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shaanxi, Hainan, Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang. Due to their different historical background and distinct geographical advantages, each Free Trade Zone is unique and has its own area of focus. By way of example, Shanghai Free Trade Zone focuses on the reform and opening up of trade, investments, and finance. Last year, Shanghai Free Trade Zone even added a new area in Lingang to further enhance the development of high-end manufacturing. Guangdong Free Trade Zone relies on its geographical advantage of being located next to Hong Kong and Macau to promote collaboration between the three regions. Tianjin Free Trade Zone focuses on building a friendly platform for financial leasing companies, which is effective in integrating Tianjin’s financial function with its manufacturing operations. Starting from this article, we will share the developments and advantages of each Free Trade Zone in China and also discuss each zone’s investment opportunities and potential policies.

 

In this article, we will introduce and discuss the ongoing developments of Zhejiang Free Trade Zone as well as new policies in place to establish it as a hub for oil and gas industries.

 

Zhejiang Free Trade Zone is located at Zhoushan Islands and was established on 1 April 2017 as China’s only Free Trade Zone stretching from onshore area to islands. As the country’s first commodity Free Trade Zone for oil and gas value chain, Zhejiang Free Trade Zone operates on the basis of investment facilitation and trade liberalization. In an effort to encourage and stimulate the development of the Zhejiang Free Trade Zone, the State Council approved the Measures to Support the Opening-up and Development of the Oil and Gas Industry Value Chain (“the Measures”) on 31 March 2020. The Measures involve the establishment of an international oil and gas trading centre, international green petrochemical base, international oil and gas storage and transport base, international marine services base, bonded fuel oil supply centre for ships from Northeast Asia, and a pilot area for internationalization of Renminbi.

 

By focusing on the trade, storage and transportation of oil and gas, the Measures aim to establish Zhejiang Free Trade Zone as an international oil and gas trading centre as well as an LNG reception centre. Inviting renowned international commodity exchanges (such as New York, London, Singapore, Dubai exchanges) as strategic investors and attracting international oil and petroleum product trading companies to set up a trading entity will assist Zhejiang Free Trade Zone in becoming an international oil and gas exchange. Oil and gas trading activities within Zhejiang Free Trade Zone are currently conducted through an exchange set up in 2015 that is run by Zhejiang International Oil and Gas Trading Centre Co., Ltd. At present, the products tradable through the exchange mainly include the spot cargo of refined oil and fuel oil, methanol, aromatic hydrocarbon, alkene and other chemicals. The establishment of an effective LNG reception centre will require dedicated infrastructure such as LNG terminals for receipt, storage, processing and delivery (in liquid form) of LNG and local pipeline network connecting to the national pipeline network for the export of natural gas. Currently, there are two LNG terminals within Zhejiang Free Trade Zone, namely ENN (新奥) Zhoushan LNG Terminal (in commercial operation) and Liuheng LNG Terminal (being jointly invested and developed by Liuheng Administration Committee, Zhejiang Energy and Natural Gas Group Co., Ltd and Shenzhen Energy and Gas Investment Holding Co., Ltd.). Going forward, Zhejiang Free Trade Zone will establish an integrated LNG park in addition to a complete value chain that covers LNG receipt, delivery, and processing, LNG cold energy utilization, LNG equipment manufacutring, gas fired power plants and other related businesses.

 

Following the launch of the Measures, Zhejiang Free Trade Zone will expedite the establishment of a natural gas exchange. Together with the two main natural gas exchanges in China, namely Shanghai Petroleum and Natural Gas Exchange (SHPGX) and Chongqing Petroleum and Natural Gas Exchange (CQPGX), the Zhejiang natural gas exchange will help promote the marketization and the development of competitive trading in domestic natural gas. This would allow downstream natural gas prices to be linked to, adjusted, and traded according to or affect the prices of upstream and pipeline natural gas and imported LNG.

 

Zhejiang Free Trade Zone provides investors and traders with a one-stop service in relation to enterprise access qualification, tax incentives, issuance of permits or licenses and other related support. Custom clearance and inspection in relation to international trade can now be completed at the same counter with the clearance time having been reduced from 16 hours to 2 hours. Moreover, the Zhoushan port has become the country’s first paperless port for the entry and exit of international vessels. At the same time, the data and items to be declared by vessels at the Zhoushan port have also been reduced by 2/3 in comparison with other ports in China.

 

Many international energy enterprises have invested and conducted business in Zhejiang Free Trade Zone. It was reported by Chinese media that:

 

In September 2019, Saudi Aramco signed a memorandum of understanding with Zhejiang Free Trade Zone to increase investments in downstream projects within Zhejiang area. In addition, Saudi Aramco plans to:

 

  • acquire from Zhejiang Petrochemicals 9% equity of the integrated petrochemical complex that is currently being developed;

 

  • enter into a long-term crude oil supply agreement with Zhejiang Petrochemicals; and

 

  • utilise the large crude oil storage facilities of Zhejiang Petrochemicals to provide services to its Asian customers.

 

Honeywell and Zhejiang Petrochemical Co., Ltd have carried out extensive research and development cooperation on refining technologies. At the same time, it has been reported that Honeywell and ENN (新奥) are in discussions to develop an oil product storage and transportation centre including a 10 million tons plus LNG logistic centre in Zhejiang Free Trade.

 

The Total group is in discussions with Zhejiang Energy and various entities regarding the potential cooperation in oil and gas projects. Aside from developing vessel fuel oil refuelling services, they are also exploring and discussing the expansion of Total’s natural gas industry chain in Zhejiang Free Trade Zone.

 

Glencore and Zhejiang Petroleum Co Ltd. (subsidiary of Zhejiang Energy Group Co Ltd.) have set up a joint venture, Zhejiang Zhe Petroleum Co., Ltd, to conduct the trading of crude oil, refined oil, fuel oil, and LNG in Zhejiang Free Trade Zone. By the end of 2019, the trade of crude oil and refined oil concluded by the joint venture has exceeded 5 million tons whilst the LNG trade has also been expanded. In order to further increase the trade of petroleum products and LNG, the joint venture will continue to leverage both the preferential policies of Zhejiang Free Trade Zone and the strength of its shareholders.

 

Clyde & Co's Energy and Finance team have extensive experience in oil and gas trading and investment projects and can provide a one-stop service to assist clients in handling different aspects of oil and gas investment and trading. Please stay tuned as we bring to you anatomy of other unique Free Trade Zone policies of the country.  

 

Clyde & Co

 

For further information, please contact:

 

Fei Kwok, Partner, Clyde & Co

[email protected]