China Signs Deal to Exploit Afghanistan’s Oil and Natural Gas Reserves

Afghanistan signed a deal on Wednesday that would allow China to become the first foreign company to exploit the country’s oil and natural gas reserves.

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The contract covers the provinces of Sari Pul and Faryab in northeastern Afghanistan, and is the first of several oil blocks to be put on the market in coming months, Afghan Minister of Mines Wahidullah Shahrani said during today’s signing ceremony. Information on bidding for blocks in neighboring Balkh province and western Herat province will be released next year.

With international combat troops set to leave Afghanistan by the end of 2014, the country is looking for ways to exploit some of its mineral wealth to offset the loss of revenues when foreign aid and spending dries up. The landlocked nation is now entirely reliant upon neighboring Iran and Central Asian nations for fuel imports, and is keen to develop an oil-extraction and refining capability.

The oil ministry listed the initial value of the project with China’s state-owned National Petroleum Corporation as $700 million, but the total could be ten times greater if more reserves are found and developed, and if international oil prices remain at today’s levels, said Shahrani.

The contract allows China to research oil and natural gas blocks in Sari Pul and Faryab, an area first explored by Soviet engineers in the 1960s, who estimated the reserves at about 87 million barrels, though Afghan and Chinese partners believe they will prove to be much larger. After the real size of the reserves is established with greater accuracy, CNPC will then build Afghanistan’s first refinery.

The Afghan government will receive 70 percent of the profits form the sale of the oil and natural gas. CNPC will also pay 15 percent in royalties, as well as corporate taxes and rent for the land used for its operations. Afghanistan’s army and police will set up special units to guard the project, though Sari Pul and Faryab are located hundreds of miles from the centers of fighting in the east and southeast and are considered relatively safe.

Soviet surveys have shown Afghanistan to be sitting on vast mineral wealth, but with poor infrastructure and security problems stemming from the now 10-year war, most Western mining companies have stayed away, while companies from China, with which Afghanistan shares a small stretch of border, have been at the forefront of investments in the nation.

The China Metallurgical Construction Co. signed a contract three years ago to develop the Aynak copper mine in Logar province, investing $3.5 billion in the project — the largest ever foreign investment in Afghanistan.

The U.S. Department of Defense has estimated Afghanistan’s mineral reserves to be worth roughly $1 trillion, while other estimates have pegged them at $3 trillion or more.

However, for Afghanistan to capitalize on its resources, it will require international investment, a better transportation network, and much improved security.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

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