Global Policy Forum

Afghan Government Awards Oil Contract in First Phase of Revenue-Generation Plan


The Afghan government has awarded its first oil contract, to a domestic company, ending the 2005 ban on drilling. Supporters believe the deal will help the Afghan government become less dependent on foreign support. Other observers see the potential problems: natural resource development can destabilize weak governments and create new conflicts. Foreign investors are unlikely to move into Afghanistan quickly because it remains unsafe in many areas, but there is a possibility for future investment in resource extraction. This first contract could indicate whether Afghanistan will be able to develop its natural wealth or whether it will fall under the "resource curse".

By Ernesto Londono

December 13, 2010

The Afghan government on Monday awarded a small but potentially path-breaking crude oil contract, marking the first phase of an effort that U.S. and Afghan officials say could bring the cash-strapped government significant revenue.

The six-month deal for crude from the Angot field in Sar-i-Pol province in Afghanistan's north was designed as a confidence-building venture for one of the world's least-attractive foreign-investment markets.

If successful, Afghan and U.S. officials hope the deal will put Afghanistan on the hydrocarbon industry map and attract direly needed private investment to this landlocked country, which is kept solvent by international donors.

"This is just the beginning," Afghanistan's Minister of Mines Waheedullah Shahrani said in an interview. "But the potential is great."

Angot is among a handful of developed fields in the Amu Darya Basin, which straddles Afghanistan and Turkmenistan. The Afghan side of the basin has an estimated 80 million barrels of proven crude reserves, according to the U.S. Geological Survey. The nearby Afghan-Tajik Basin could hold as much as 1.5 billion barrels worth of crude, according to a study the agency commissioned in 2006. Together, the two areas have the potential to generate hundreds of millions of dollars per year in government revenue over the next two decades, U.S. officials estimate.

If the Afghan government manages to attract energy companies to develop its oil sector over the next few years, the country could meet its own fuel needs and perhaps export oil sometime in the next decade, U.S. officials said.

"This step means that Afghanistan is now an oil-producing nation, creating jobs for Afghans and an environment that will enable future investment in developing the oil sector," said U.S. Deputy Under Secretary of Defense Paul A. Brinkley, who oversees the Pentagon's business stabilization efforts in Iraq and Afghanistan.

Brinkley's office has invested nearly $1.5 million dollars in devising the strategy to revive Afghanistan's oil sector, which has been paralyzed for decades because of war and poor governance.

American officials acknowledge the challenges are huge. The country remains mired in a nearly decade-long war. Its entrenched culture of corruption has long dissuaded foreign investors. Its politics remain volatile. And its regulatory and legal sectors are arbitrary and vulnerable to cronyism.

"There's huge room for error," said a senior American official involved in the effort who spoke candidly on the condition of anonymity. "The whole thing could fall flat on its face."

Ben Lando, who runs the Iraq Oil Report and has studied emerging oil markets, said, too, that oil wealth can be destabilizing in the short term.

"There's a good chance Afghanistan could be stricken by the resource curse rather than come to use its oil for the benefit of its citizens," Lando said. "Oil wealth has a history of having a deteriorating effect on unstable governments with underdeveloped institutions and institutionalized corruption."

But U.S. officials say tapping the crude reserves would help start weaning Afghanistan's dependence on foreign aid as the international community disengages in the years ahead. The potential revenue involved is small, but significant, Afghan and U.S. officials say. The Afghan government spends $3.3 billion a year, but collects only $1 billion in revenue.

Afghanistan remains largely disconnected from the global economy. It depends on the United States and other donors for basic necessities such as making payroll and keeping police and army vehicles fueled. The United States spends roughly $250 million a year on diesel fuel for the Afghan national army and police.

Afghan officials hope the country's vast mineral reserves will steer the country closer to financial sovereignty by 2014, the year international troops hope to turn over complete security responsibility to the Afghan government.

Shahrani, the mines minister, said Afghanistan could start reaping $1.2 billion per year in revenue from its iron and copper deposits within five years if it manages to attract investors. That could balloon to $3.5 billion in revenue in 15 years, he said.

Jump-starting the energy and agriculture sectors has become a priority for U.S. officials. They say that a diversified economy would create jobs, which in turn would dissuade more Afghans from joining extremist groups and partaking in the lucrative opium trade.

The field at Angot was first discovered in 1959. Swedish and Russian state-owned companies drilled 14 wells there the following decade, but little crude was extracted.

A regional commander got the wells pumping in 2002, shortly after the fall of the Taliban. But Afghan President Hamid Karzai issued a decree banning extraction in 2005, because the government was not receiving revenue.

When the wells at the Angot field are uncapped in the coming days, Mines Ministry employees will extract the crude. The field is expected to pump roughly 800 barrels per day, a yield that will bring the government an estimated $1 million a month in revenue.

Two companies owned by wealthy Afghan families submitted bids for the Angot tender, which the Mines Ministry drafted with assistance from Brinkley's team.

Ghazanfar Neft Gas, which owns gas stations around the country, won the deal. Kam Group, which also operates an airline and a refinery, submitted the losing bid. No foreign investors submitted bids.

Under the terms of the contract, the winning company will collect crude at the wells and arrange to have it refined and sold as fuel. If that works out, the government will issue a new tender next spring for extraction at Angot and the four other developed fields in the Amu Darya Basin.

Under that deal, known as a production-sharing contract, the winning company would be involved in drilling and would split the revenue generated by the sale of crude with the government. U.S. officials estimate the bloc could generate as much as $50 million a year in revenue for the government.

If the second phase succeeds, the government would seek an investor interested in developing the Afghan-Tajik Basin. Because the reserves there are not proven, and building the infrastructure to start drilling would take years, the government would need to find an energy giant or a consortium with deep pockets.

The regions where the reserves are located are among the safest in the country, but the security situation is sure to remain a concern for prospective investors. As the U.S. military has moved in on Taliban strongholds in the south, cells of fighters have migrated to the north.

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