Afghanistan, China sign 1st oil contract

[December 28, 2011]  KABUL, Afghanistan (AP) -- Afghanistan's government signed a deal Wednesday with China's state-owned National Petroleum Corporation, allowing it to become the first foreign company to exploit the country's oil and natural gas reserves.

The contract, which covers the northeastern provinces of Sari Pul and Faryab, is the first of several such blocks to be put on the market in coming months, Afghan Minister of Mines Wahidullah Shahrani said during the signing ceremony.

Bidding information for blocks in neighboring Balkh province will be released at the end of February, and for the western Herat province by next summer, he said.

Afghanistan has been seeking to find ways to exploit some of its mineral wealth to offset the loss of revenues when foreign aid and spending drops when international combat troops leave by the end of 2014. The government has been keen to develop an oil-extraction and refining capability for the landlocked nation, which is entirely reliant on fuel imports from neighboring Iran and Central Asian nations.

"This will bring enormous financial benefits to the government," Shahrani said. "It will be an important step toward self-sufficiency."

The ministry listed the initial value of the project with CNPC 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, Shahrani said.

The fuel pact allows the Chinese firm to research oil and natural gas blocks in Sari Pul and Faryab, an area known as the Amu Darya River Basin that was first explored by Soviet engineers in the 1960s. The Soviets estimated the reserves at about 87 million barrels, but both the Afghan and Chinese partners believe they will prove to be much larger.

CNPC will also build a refinery -- Afghanistan's first -- within the next three years, after the real size of the reserves is established with greater accuracy, said Lu Gong Xun, president of CNPC's international branch.

Shahrani said the deal calls for the Afghan government to receive 70 percent of the profits from 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, Shahrani said.

The provinces of Sari Pul and Faryab are located hundreds of miles from the centers of fighting in the east and southeast and are considered relatively safe. As a result, the U.S.-led NATO force has already transferred or is turning over responsibility for security in large parts of the region to the Afghan army and police.

Surveys conducted by the Soviets have shown that Afghanistan sits on vast mineral wealth. Afghan and foreign companies already have shown interest, notably in its untapped copper, iron and oil deposits. But with poor infrastructure and security problems stemming from the 10-year war, most Western mining companies have shied away from firm commitments.

So far, companies from China -- with which Afghanistan shares a small stretch of border in its east -- have been in the forefront of investments in the nation.

Three years ago the China Metallurgical Construction Co. signed a contract to develop the Aynak copper mine in Logar province. Beijing's $3.5 billion stake in the mine is the largest foreign investment in Afghanistan so far.

The U.S. Defense Department has put a $1 trillion price tag on Afghanistan's mineral reserves. Other estimates have pegged it at $3 trillion or more.

But the potential windfall for the landlocked country will require international investment, a better transportation network and much improved security.

"This government must stand on its feet," said Mustafa Zahir, the head of the government's environment agency. "Without using our natural resources we cannot achieve this."

[Associated Press; By SLOBODAN LEKIC and PATRICK QUINN]

Associated Press writer Rahim Faiez contributed to this report.

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