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Afghanistan releases hydrocarbon acreages July 26, 2012

Posted by nishankmotwani in : Afghanistan, By country, Future Directions International , trackback

Liam McHugh

Background

In July, the Afghan Mining Ministry announced the release of exploration rights for oil and gas developments in the state’s north-west. Extractive industries could provide Kabul with much needed revenue as it enters the next stage of its post-Taliban reconstruction period. The existence of resources, however, does not automatically translate to productivity. Geopolitical politicking, corruption, governance issues and the security situation may constrain the sector.

Sources: U.S.G.S.; Afghanistan Geological Survey; U.S. Department of Defense

Comment

A central theme of June’s Second International Tokyo Conference on Afghanistan focused on the economic future of the state post-ISAF withdrawal. Understandably, aid from international donors will continue to make up a significant portion of Afghanistan’s Gross Domestic Product. Recently, however, developments within the nation’s hydrocarbon sector have bolstered opportunities for greater economic independence. Energy firms, including top-tier conglomerates, have signalled an interest in developing potential reserves in basins in Afghanistan’s northern regions.

Although presently unexploited, surveys suggest Afghanistan is endowed with rich mineral and energy reserves. Prior to the Soviet invasion, between 1957 and 1984, seven condensate and eight gas fields were discovered, predominantly near the Tajik border. Conflict and the collapse of Afghanistan destroyed the nation’s hydrocarbon sector. Currently, the state has only four active fields, with only one producing oil. In addition to facing energy policy challenges, Kabul has also had to contend with a decline in public revenue from these fields and damage to related downstream activities.

As a result of the relative improvement in governance and security since the fall of the Taliban, hydrocarbons are once again a viable industry for Afghanistan. In early 2006, further strengthening its viability, Kabul announced the discovery of 3.6 billion barrels of oil and 36.5 trillion cubic feet of gas reserves. Although small by global standards, the reserves could prove significantly profitable for Kabul. Nascent developments have led to a domestic production capability, led by Ghazanfar Neft Gas. In December 2010, Ghazanfar was awarded a contract for the northern Angot field and has successfully collected and marketed crude oil. Earlier this year, in an even more promising development, China National Petroleum Company (CNPC) won the rights to develop the oil fields in the Amu Darya basin.

Now, in the latest development, several energy companies are competing for rights to explore six blocks in the western portion of the Afghan-Tajik Basin in the north. According to a Mining Ministry statement, these include Dubai-based Dragon Oil, Kuwait Energy, India’s ONGC Videsh, Brazil’s Petra Energia, Pakistan Petroleum, Thailand’s PTT, Turkey’s TPAO and Exxon Mobil from the US.

The inclusion of Exxon Mobil is notable. Commentators have suggested that Exxon’s interest is a positive sign for Afghanistan’s oil and gas prospects. Security and infrastructure concerns generally preclude oil majors from speculative operations. Usually, smaller operators exploit these opportunities, but are later cannibalised by the larger companies. It is therefore significant that the world’s largest publicly traded firm has sought these opportunities. This may change the perceptions of Afghanistan within the sector, with more top-tier competitors following suit.

Interestingly, the other companies vying for blocks are state-owned or semi-state owned enterprises. This is largely consistent with the minerals sector and is perhaps reflective of geopolitical competition for influence post-2014. Indian and Chinese firms have been actively competing to exploit Afghanistan’s extractive industries. The emerging security dilemma between the two rising powers may well find a theatre in Afghanistan, with both important stakeholders in the future stability of the state.

Surprisingly, Russian companies are conspicuous by their absence. Hydrocarbons and petro-politics have been central themes of the Putin foreign policy doctrine, influenced by Soviet nostalgia for unchallenged regional power across Eurasia.  Undoubtedly, Russia will hope to bring Afghanistan back into its traditional sphere of influence as international troops withdraw. Support for oil and gas operations are among Moscow’s strongest credentials. Therefore, in the future, if oil and gas projections prove accurate, Gazprom and Rosneft may enter the Afghan market, competing not only for reserves, but also to assuage challenges to Russian influence.

Domestically, for Kabul, oil and gas could provide a much needed life-line. Predictably, Afghanistan has few viable industries; 97 per cent of the nation’s GDP – excluding opium production – comes from foreign donations. Conscious of donor fatigue, economic considerations have been a policy priority for Kabul. Projections suggest that realisation of the oil potential could create a sector comparable to that of Equatorial Guinea, one of Africa’s largest suppliers. According to the World Bank, this could supplement GDP by $9.1 billion a year, the equivalent of nearly 50 per cent of Afghanistan’s 2011 total GDP. Gas provides scope for even greater potential.

Of course the challenges are significant. Energy companies wishing to invest will be faced with numerous obstacles, including widespread graft, governance issues and, naturally, Afghanistan’s poor security situation.

Corruption in Afghanistan is endemic and pervasive. For instance, in June, highlighting the extent of the problem, the Afghan government acknowledged that militia loyal to army chief of staff, General Abdul Rashid Dostum, were responsible for disrupting CNPC’s operations. The armed group intimidated engineers and created obstacles for exploration. This is not likely to be peculiar to this region, nor CNPC’s activities; other companies should expect and prepare for similar scenarios.

Afghanistan is synonymous with violence. It features the hallmarks of a failed state, with a tense security situation. Progress has been modest and, in fact, according to the United Nations, in 2012 violence has reached its most critical level since the decade-long occupation began. This presents a significant risk for investors, bringing with it sovereign risk concerns and increasing capital costs. Importantly, however, tense security situations have tended to be ‘occupational risks’ in the hydrocarbon sector, affecting advanced projects in Iraq, Nigeria and Sudan. Consistent with this view, the Mining Ministry notes that the current security situation in the proposed north-west Afghan blocks is relatively stable. Balkh province, and its largest city, Mazar-e-sharif, are among the most peaceful areas of Afghanistan. Other neighbouring provinces, including Jowzjan, Sar-E Pol and Faryab, have witnessed hostile activity, but mainly limited to small rural Pashtun villages. Indeed, the ministry notes that while security is undoubtedly required for facilities, the threat level is, in fact, notably lower than in Iraq.

Presently, it is too early to make a long-term assessment about the viability of the hydrocarbon sector in Afghanistan. Given the potential revenue opportunities, however, Kabul has a clear motivation for promoting the industry. While the challenges are great, they are not insurmountable. Certainly, if any industry is capable of negotiating these obstacles it is the hydrocarbon sector; a forecast that has been demonstrated in various other states with well documented flashpoints.

Liam McHugh is a Research Manager at Future Directions International for Northern Australia & Energy Research Programmes.

This article first appeared on Future Directions International on 25 July 2012.

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