Afghanistan cabinet OKs oil deal with China's CNPC

Reuters News
Posted: Dec 26, 2011 10:13 AM
Afghanistan cabinet OKs oil deal with China's CNPC

By Mirwais Harooni

KABUL (Reuters) - Afghanistan's cabinet cleared the way for the war-torn state to sign a deal with China National Petroleum Corp (CNPC) for the development of oil blocks in the Amu Darya basin, the Afghan president's office said on Monday.

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

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.

"The Afghan cabinet has ordered Mines Minister Wahidullah Shahrani to sign an oil exploration contract for Amu Darya with China National Petroleum Corporation," the statement said.

Jawad Omar, a spokesman for the mines ministry, said the contract would be signed on Wednesday.

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.

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

The mines ministry said in October that the deal was likely to result in government revenues of $5 billion over the next 10 years.

Indian and Chinese bidders have been front-runners for deals to develop Afghanistan's vast mineral deposits, which are valued at $3 trillion, worrying Western firms that have hesitated to invest in the country due to security concerns.

Experts have warned that mining projects in Afghanistan are likely targets for insurgents, that production and transport costs will be high and that 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.

(Writing by Agnieszka Flak; Editing by Sanjeev Miglani and Jane Baird)