PROVISIONS CONCERNING THE PAYMENT OF ROYALTIES FOR THE EXPLOITA-TION OF OFFSHORE PETROLEUM RESOURCES

PROVISIONS CONCERNING THE PAYMENT OF ROYALTIES FOR THE EXPLOITA-TION OF OFFSHORE PETROLEUM RESOURCES (Approved by the State Council on December 5, 1988, promulgated byDecree No. 1 of the Minister of Finance on January 1, 1989) Important Notice: This English document is coming from the "LAWS AND REGULATIONS OF THE PEOPLE'S REPUBLIC OF CHINA GOVERNING FOREIGN-RELATED MATTERS" (1991.7) which is compiled by the Brueau of Legislative Affairs of the State Council of the People's Republic of China, and is published by the China Legal System Publishing House.

In case of discrepancy, the original version in Chinese shall prevail.

Whole Document PROVISIONS CONCERNING THE PAYMENT OF ROYALTIES FOR THE EXPLOITA- TION OF OFFSHORE PETROLEUM RESOURCES (Approved by the State Council on December 5, 1988, promulgated by Decree No. 1 of the Minister of Finance on January 1, 1989) Article 1 These Provisions are formulated in accordance with the "Regulations of the People's Republic of China on the Exploitation of Offshore Petroleum Resources in cooperation with Foreign Enterprises", in order to promote the development of national economy, to expand international economic and technological cooperation, and to encourage the exploitation of China's offshore petroleum resources.

Article 2 All Chinese and foreign enterprises, which are engaged in the exploitation of offshore petroleum resources pursuant to the law in the inland sea, territorial sea and continental shelf of the People's Republic of China and in any other sea areas under the jurisdiction of the People's Republic of China, shall pay royalties in accordance with these Provisions.

Article 3 Royalties shall be computed and imposed on the basis of the gross output of crude oil or natural gas produced every calendar year from each oil or natural gas field. The rates of the royalties are as follows: 1. Crude oil the portion of annual gross output of crude oil not exceeding 1 million tons, shall not be subject to the payment of royalties; for the portion of annual gross output of crude oil from 1 million to 1.5 million tons, the rate shall be 4%; for the portion of annual gross output of crude oil from 1.5 million to 2 million tons, the rate shall be 6%; for the portion of annual gross output of crude oil from 2 million to 3 million tons, the rate shall be 8%; for the portion of annual gross output of crude oil from 3 million to 4 million tons, the rate shall be 10%; for the portion of annual gross output of crude oil exceeding 4 million tons, the rate shall be 12.5%.

2. Natural gas the portion of annual gross output of natural gas not exceeding 2 billion cubic meters, shall not be subject to the payment of royalties; for the portion of annual gross output of natural gas from 2 billion to 3.5 billion cubic meters, the rate shall be 1%; for the portion of annual gross output of natural gas from 3.5 billion to 5 billion cubic meters, the rate shall be 2%; for the portion of annual gross output of natural gas exceeding 5 billion cubic meters, the rate shall be 3%.

Article 4 The royalties for crude oil and natural gas shall be paid in kind.

Article 5 The royalties for crude oil and natural gas shall be levied and administered by the tax authorities.

With respect to the royalties of Chinese-foreign Cooperative oil or gas fields, the operators shall act as agents for withholding the royalties, and shall hand over the royalties withheld to China National Offshore Petroleum Corporation, which, in turn, shall act as an agent for making the payment of the royalties.

Article 6 The royalties shall be computed annually and paid in advance in installments either based on times or on terms; and the final settlement shall be made after the end of the tax year. The time limits for advance payment and final settlement shall be set by the tax authorities.

Article 7 The oil or gas fields operators shall, within 10 days after the end of each quarter, submit to the tax authorities a report on the output of oil or gas fields and any other related materials required by the tax authorities.

Article 8 The withholding agents and paying agents with regard to the royalties must, in accordance with the time limits set by the tax authorities, pay the royalties. In case of failure to pay the royalties within the time limits, the tax authorities shall impose a surcharge for overdue payment equal to 1% of the overdue royalties for everyday in arrears, starting from the first day the payment becomes overdue.

Article 9 In the case that the oil or gas fields operators, in violation of the provisions in Article 7, fail to submit on time to the tax authorities the reports on output of oil or gas fields and other related materials required by the tax authorities, the tax authorities may impose a fine in light of the circumstances up to but not exceeding CNY 5,000 yuan; in dealing with those who conceal the actual output, the tax authorities, in addition to pursuing the royalties payment, may impose a fine, in light of the circumstances, up to but not exceeding five times of the amount of royalties that shall be made up.

Article 10 The following terms, used in these Provisions, are defined below: (1) Crude oil: refers to solid and liquid hydrocarbon in the natural state as well as any liquid hydrocarbon extracted from natural gas, except for methane (CH 4) (2) Natural gas: refers to non-associated natural gas and associated natural gas in the natural state.

Non-associated natural gas: refers to all gaseous hydrocarbon extracted from gas deposits, including wet gas, dry gas, and residual gas remaining after the extraction of liquid hydrocarbon from wet gas.

Associated natural gas: refers to all gaseous hydrocarbon extracted from oil deposits simultaneously with crude oil, including residual gas remaining after the extraction of liquid hydrocarbon.

(3) Annual gross output of crude oil: refers to the total amount of crude oil produced by each oil or gas field in the same contracted area, in one calendar year, less the quantity of oil used for petroleum operations and that of wasted.

(4) Annual gross output of natural gas: refers to the total amount of natural gas produced by each oil or gas field in the same contracted area, in one calendar year, less the quantity of natural gas used for petroleum operations and that of wasted.

Article 11 These Provisions shall become effective as of January 1, 1989.

the royalties.

Article 6 The royalties shall be computed annually and paid in advance in installments either based on times or on terms; and the final settlement shall be made after the end of the tax year. The time limits for advance payment and final settlement shall be set by the tax authorities.

Article 7 The oil or gas fields operators shall, within 10 days after the end of each quarter, submit to the tax authorities a report on the output of oil or gas fields and any other related materials required by the tax authorities.

Article 8 The withholding agents and paying agents with regard to the royalties must, in accordance with the time limits set by the tax authorities, pay the royalties. In case of failure to pay the royalties within the time limits, the tax authorities shall impose a surcharge for overdue payment equal to 1% of the overdue royalties for everyday in arrears, starting from the first day the payment becomes overdue.

Article 9 In the case that the oil or gas fields operators, in violation of the provisions in Article 7, fail to submit on time to the tax authorities the reports on output of oil or gas fields and other related materials required by the tax authorities, the tax authorities may impose a fine in light of the circumstances up to but not exceeding CNY 5,000 yuan; in dealing with those who conceal the actual output, the tax authorities, in addition to pursuing the royalties payment, may impose a fine, in light of the circumstances, up to but not exceeding five times of the amount of royalties that shall be made up.

Article 10 The following terms, used in these Provisions, are defined below: (1) Crude oil: refers to solid and liquid hydrocarbon in the natural state as well as any liquid hydrocarbon extracted from natural gas, except for methane (CH 4) (2) Natural gas: refers to non-associated natural gas and associated natural gas in the natural state.

Non-associated natural gas: refers to all gaseous hydrocarbon extracted from gas deposits, including wet gas, dry gas, and residual gas remaining after the extraction of liquid hydrocarbon from wet gas.

Associated natural gas: refers to all gaseous hydrocarbon extracted from oil deposits simultaneously with crude oil, including residual gas remaining after the extraction of liquid hydrocarbon.

(3) Annual gross output of crude oil: refers to the total amount of crude oil produced by each oil or gas field in the same contracted area, in one calendar year, less the quantity of oil used for petroleum operations and that of wasted.

(4) Annual gross output of natural gas: refers to the total amount of natural gas produced by each oil or gas field in the same contracted area, in one calendar year, less the quantity of natural gas used for petroleum operations and that of wasted.

Article 11 These Provisions shall become effective as of January 1, 1989.