Key due diligence issues for gas M&A

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Gas as enterprises can accelerate transformation through M&A, expanding their scale to quickly enter regional markets. This article discusses key points that distinguish legal due diligence issues of gas M&A projects from other industries.

GAS BUSINESS LICENCE

Article 15 of the Regulations on the Administration of Urban Gas stipulates that “the state implements a licensing system for gas operations”. In other words, enterprises engaged in gas business are required to obtain a gas business licence from the gas administration department of the local people’s government at or above county level.

When verifying such a licence, special attention should be given to the scope, region and validity period of the franchise stated in the licence. In addition, based on actual business activities, it should be judged whether there is any out-of-scope operation, out-of-term operation, operation before obtaining the gas business licence, or other such violations. Importantly, gas business activities are actually carried out by holding a hazardous chemical business licence, typically in the form of LNG (liquefied natural gas) single-point direct-supply gasification station operations.

In due diligence, enterprises should therefore focus on whether the gas is sold as fuel or industrial raw materials, and whether the activities involve only sales conducted by way of bills, or also include self-processing, storage, transportation and terminal operation. Since the devastating Shiyan gas pipeline explosion in Hubei on 13 June 2021, tragically resulting in 25 deaths and 138 injuries, gas administration departments nationwide have intensified inspection of illegal gas operations, especially single-point direct-supply stations.

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