State-owned China National Petroleum Corp (CNPC) was given approval by the Afghan government to sign the joint-venture deal with diversifiedAfghan company, the Watan Group.

The Chinese will lead the exploration for oil in three fields in the Kashkari, Bazarkhami and Zamarudsay basins, located in the northern provinces of Sar-e Pul and Faryab, which are estimated to hold around 87 million barrels.

A spokesman for the Afghan Government’s mines ministry, Jawad Omar, said the contract would be officially signed on Wednesday.

“The Afghan cabinet has ordered Mines Minister Wahidullah Shahrani to sign an oil exploration contract for Amu Darya with China National Petroleum Corporation,” the Kabul administration confirmed in a statement.

If successful, the partnership could boost government revenues by $5 billion (£3.2 billion) over the next 10 years.

CNPC has agreed to give up to 70 per cent of profits from the project to the Kabul government, and has agreed to pay a 15 per cent royalty on oil production plus 20 per cent corporate tax.

It is the second major deal for Beijing in the war-torn country and demonstrates the Chinese willingness to risk security issues in order to secure energy supplies and meet its unrelenting demand.

Afghanistan has vast mineral deposits valued at £1.92 trillion.

But few Western firms have invested in the sector due to security concerns.

Such sites are seen as a targets for insurgents and the transportation logistics over long distances adds to the increased exposure to attack and pipeline interruptions.

However, the West’s hesitation has been to the advantage of the risk-taking Chinese and the other energy-thirsty Asian economic powerhouse, India, which is also increasing its presence.

Cash-rich Beijing and Delhi have the necessary deep pockets to pay for expensive production and transport costs, such is the need for reliable supplies to fuel their booming economies.

For China, the deal strengthens its hand in the country after state-owned enterprise Metallurgical Corp signed a contract in 2008 to develop the Aynak copper mine south of Kabul.

The vast mine is expected to start producing by the end of 2014.

However, some analysts believe the attraction to tap Afghanistan’s oil and mineral deposits – whatever their size and despite the obvious difficulties – is only one of multiple incentives as Beijing seeks out much wider investment opportunities.

As stability returns to the conflict ravage country, its damaged infrastructure will need urgent and long term repair to spark economic growth and development – a sector in which China is keen to bill itself as an expert and spearhead.

Central Asia is also seen as a key investment ground by China, which is building new – and re-establishing old – Silk Road trade routes with several neighbouring Stan states as it seeks to expand its regional influence and better control its energy security.

One obvious added potential risk to China’s investment in Afghanistan – other than those immediately in the country, however, is the fuelling of resentment among insurgents against Beijing’s treatment of its Muslim Uyghur population in the restless western province of Xinjiang.

Source: Energy Insights