New Import Tax Policy Bolsters Oil and Gas Exploration and Development

Recently, the Ministry of Finance, the General Administration of Customs, and the State Taxation Administration jointly issued the “Notice on Preferential Import Tax Policies for the Exploration, Development, and Utilization of Energy and Resources during the 15th Five-Year Plan Period” (hereinafter referred to as the “Notice”). Subsequently, supporting administrative measures from six departments were promptly put in place. This comprehensive policy package spanning the next five years extends tax relief to key equipment used in offshore oil and gas exploration and addresses the pressing issue of price inversions between imported natural gas and domestic prices.

According to an analysis report by Guoxin Securities, this move aims to enhance China’s domestic oil and gas self-sufficiency by reducing the import costs of deep-sea exploration equipment. As the global energy landscape continues to navigate uncertainty and seek a new direction, China has chosen to leverage tariff measures to unlock the potential of its vast underground resources, while also establishing a “buffer zone” for imported natural gas.

Targeting the Weaknesses in High-End Equipment

According to energy statistics from Rystad Energy, global investment in greenfield offshore oil and gas projects has remained at a high level over the past two years, following a breakthrough above US$100 billion in 2022. From 2011 to 2023, deepwater discoveries accounted for an average of 51% of annual global oil and gas finds. The International Energy Agency further projects that deepwater natural gas production will surge from 83 billion cubic meters in 2015 to 461 billion cubic meters by 2040. As a result, the deepwater sector has become the primary battleground for competition among the world’s major energy players. China National Offshore Oil Corporation (CNOOC), the leading domestic player in offshore oil and gas exploration and development, plans capital expenditures of RMB 132.7 billion in 2024—up RMB 3.1 billion from 2023—and is expected to maintain this high level in 2025 as well.

However, despite the massive investment, the technological level of high-end deep-sea equipment still needs further improvement in terms of domestic content. According to a research report by Guoxin Securities: “China is now capable of building sixth-generation semi-submersible drilling rigs such as the ‘Fendou’ and the ‘Blue Whale 1,’ but core equipment like deepwater drilling rigs and deepwater blowout preventers remains dependent on imports, and the subsea oil-and-gas production systems used in deepwater field development are also largely imported.”

This new policy sends a clear positive signal for domestically operated offshore oil and gas exploration and development projects: imports of equipment and instruments that cannot be produced domestically or fail to meet performance requirements are exempt from import duties. For Sino-foreign cooperative projects, both import duties and value-added tax at the import stage are waived. This is not merely a continuation of previous policies; rather, it represents a targeted boost to China’s deep-sea strategy. “Tariff exemptions directly reduce the procurement costs of this critical hardware, enabling companies to shed some of the financial burden in the high-stakes competition in deep-water operations,” said a senior domestic exploration and development expert.

According to estimates by Guoxin Securities, cost reductions will effectively boost project internal rates of return and, in particular, facilitate the development of marginal oil and gas fields. As exploration in the deepwater South China Sea pushes deeper into ever-greater depths, every incremental cost cut could determine the commercial viability of a given block.

VAT Rebates to Smooth Import Volatility

In 2025, China’s natural gas consumption is projected to reach 432 billion cubic meters, with imported natural gas accounting for approximately 40% of the total. Of this, LNG imports are expected to amount to about 95 billion cubic meters, while pipeline gas imports will total 83.2 billion cubic meters.

Domestic gas has low and relatively stable extraction costs, while imported pipeline gas prices are largely linked to crude oil prices and thus remain fairly stable. However, spot LNG prices tend to surge during periods of market tightness, leading to significant price volatility that deters both importers and end-users.

The new policy provides for the categorized refund of value-added tax at the import stage. For long-term gas contracts signed before the end of 2014, the import-stage VAT shall be refunded at a rate of 70%. For other natural gas, when the import price exceeds the reference benchmark, the refund shall be granted at 80% of the inverted-price differential, with each quarter serving as the calculation period.

“This includes major pipeline natural gas supplies, such as the Central Asia Pipeline, the China–Myanmar Pipeline, and the Power of Siberia pipeline. Long-term LNG contracts are primarily those signed before 2014, when crude oil prices were high, by the ‘Big Three’ state-owned oil companies.” According to an analysis by Guoxin Securities, “when high-priced gas sources flood the market, tax rebates directly offset a portion of procurement costs.”

For spot LNG, as long as the import price exceeds the benchmark, the excess amount is refunded on a pro-rata basis. This gives companies the confidence to continue importing even when prices are at high levels.

The research team at Cinda Securities notes that, should international gas prices once again experience sharp volatility due to geopolitical conflicts or extreme weather, this rebate mechanism will help domestic importers avoid being deterred by substantial losses.

Seamlessly streamline the industrial chain

The policy unveiled this time targets not only exploration and imported gas, but also the comprehensive improvement of the energy production, supply, storage, and sales system.

This new policy features a more refined management mechanism. The accompanying administrative measures clearly delineate the responsibilities of the project-leading authorities: the Ministry of Natural Resources is responsible for approving marine geological survey projects, while China National Petroleum Corporation, Sinopec Group, and China National Offshore Oil Corporation, as the project-leading authorities, issue confirmation forms. New natural gas projects are notified to the relevant departments by official letters from the National Development and Reform Commission and the National Energy Administration.

For the first time, offshore oil and gas pipeline emergency response projects have been explicitly included in the scope of tariff exemptions. Energy security is not only about routine supply; it is equally critical to having robust emergency response capabilities in the face of sudden incidents. Granting tariff reductions or exemptions for emergency rescue equipment effectively bolsters the nation’s strategic reserve of emergency preparedness. “As the marginal conditions for developing deepwater oilfields become increasingly complex and extreme weather events can strike offshore platforms at any moment, building up this emergency response capacity is more essential than ever,” said a senior veteran in China’s exploration and development sector.

Whether the policy dividends of the future can truly translate into industrial competitiveness ultimately hinges on the outcomes of companies’ deep-sea drilling operations and on the reliable delivery of natural gas from receiving terminals to households across the country.

Tackling the challenges of deep-sea exploration requires robust equipment, while mitigating price volatility calls for well-designed institutional frameworks. China has chosen to provide sustained policy support to underpin energy exploration and development, offsetting import tariffs to enhance energy security, thereby ensuring solid backing for both fronts.

Source: China Energy News