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Afghanistan signs major oil deal with China

Dec 28 2011 13:08 Reuters

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Kabul - Afghanistan signed a deal with China National Petroleum Corp (CNPC) on Wednesday for the development of oil blocks in the Amu Darya basin, a project expected to earn the war-torn state billions of dollars over two decades.

The deal covering drilling and a refinery in the northern provinces of Sar-e Pul and Faryab is the first international oil production agreement entered into by the Afghan government for several decades.

“In 30 days from now they (CNPC) will shift their experts and equipment to the site,” Mining Minister Wahidullah Shahrani told a news conference.

“The practical work will start in October 2012.”

The contract is valid for 25 years.

It marks the second major deal for China in Afghanistan after Metallurgical Corp of China signed a contract in 2008 to develop the huge Aynak copper mine south of Kabul, which is due to start producing by the end of 2014.

State-owned CNPC and joint venture partner Watan Group, a diversified Afghan company, will explore for oil in three fields in the basin - Kashkari, Bazarkhami and Zamarudsay - which are estimated to hold around 87 million barrels of oil.

For now, CNPC has only rough estimates of how much it is likely to invest in the project, said Lu Gong Xun, president of CNPC’s international branch.

“We can only give you a rough number for initial investment. Based on my experience it should be around... minimum of $400m,” he said.

Under the contract, CNPC will agree to pay a 15% royalty on oil, a 20% corporate tax and give up to 70% of its profit from the project to the Afghan government.

CNPC will also pay rent for land used for its operations.

“If the oil price stays at around $100 dollars over the next 23 years and if oil found in those fields is 87 million barrels, we estimate that our income from this project will be at least $7bn,” he said.

Indian and Chinese bidders have been frontrunners for deals to develop Afghanistan’s vast mineral deposits, which are valued at up to $3 trillion, worrying Western firms that have hesitated to invest there due to security concerns.

The mines minister said information on bidding rounds for oil blocks in the northern Balkh province will be released at the end of February and for western Herat province by mid-2012.

Experts have warned that mining projects in Afghanistan are likely targets for insurgents, production and transport costs will be high, and sovereign risk is a serious concern.

But China and India, where demand for energy and industrial inputs is booming, are willing to take risks to secure supplies.

Sar-e Pul and Faryab provinces are removed from Afghanistan’s main conflict areas. The minister also said that security would be provided to guard the project.
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