Sept. 13 (Bloomberg) -- China National Petroleum Corp. offered the highest royalty and a refinery to win Afghanistan’s first oilfield auction last month, using a strategy that helped Chinese companies gain access to African resources.
CNPC will pay 15 percent royalty on oil from three blocks in northern Afghanistan and 30 percent corporate tax and also build a refinery, Abdul Jalil Jumriany, policy director at the mines ministry in Kabul, said by e-mail. Australia’s Buccaneer Energy Ltd. proposed 10 percent royalty and was second, he said.
The deal, to be completed in a month, will boost China’s position as its neighbor’s biggest foreign investor after a state company won the right in 2007 to mine the biggest copper deposit in Afghanistan by pledging to build a coal mine, power plant, smelter and railroad. In Africa, producer of 12 percent of the world’s crude, Chinese companies promised billions of dollars in aid, investment and loans for energy supplies.
“China is certainly seeking resource security, but its motives are broader,” Deborah Brautigam, a Washington-based scholar and author on Chinese-African relations, said in a Sept. 9 telephone interview. China’s state-owned companies are likely pursuing Afghan deals “for commercial, strategic, political and resource-security reasons all combined.”
Three calls to CNPC’s public relations department in Beijing went unanswered. Mao Zefeng, a spokesman at unit PetroChina Co., declined to comment when reached by telephone.
Amu Darya Basin
President Hamid Karzai’s cabinet late last month approved the mines ministry’s decision to allow CNPC to drill for oil in three blocks of the Amu Darya basin, a geological zone that extends into Turkmenistan and Uzbekistan.
While CNPC’s oil deal, for blocks that hold an estimated 80 million barrels, is relatively small, its win may give the company an advantage in chasing bigger Afghan reserves. The Afghan-Tajik Basin, a geological zone in the northeast, is estimated to hold 1.9 billion barrels of undiscovered oil and natural-gas liquids along with gas deposits equivalent to 1.5 billion barrels of oil, based on U.S. Geological Survey data.
The government will hold its next oilfield auction in the area in February, Jumriany said.
A refinery is crucial for Afghanistan, which imports almost all its fuels and has seen supplies halted by border closures with Iran and Pakistan. In January, Iran blocked as many as 1,900 fuel tanker trucks at its border for a month, forcing a spike in transport and food prices across Afghanistan.
“The business case for a refinery is good,” Jumriany said. Afghanistan needs large supplies of asphalt, refined from crude, to pave thousands of kilometers of dirt track as modern roads.
Afghanistan’s only working refinery, opened last year on its northern border with Uzbekistan, has a capacity to produce 500 tons (3,650 barrels) of fuels a day, according to its owner, the Kabul-based Kam Group. The nation uses 46,000 barrels of petroleum products each day, Jumriany said.
The size of the proposed refinery is part of negotiations with CNPC that may lead to a final contract next month, Deputy Mines Minister Nazir Ahmad Durrani said by telephone from Kabul.
While most foreign investors have hesitated to enter Afghanistan because of the decade-long war, investments by CNPC and the Metallurgical Corp. of China are of strategic importance to the Chinese government. The oil blocks won by CNPC and the Aynak copper deposit, south of Kabul, lie within 400 miles (640 kilometers) of China’s western frontier.
Developing and importing resources from across that border will help accelerate economic development in its border province of Xinjiang, according to Richard Weitz, political-military analysis director at the Hudson Institute, a policy research organization in Washington.
China is eager to boost incomes in Xinjiang, where it has faced riots and protests by ethnic Uighurs.
Tethys Petroleum Ltd., one of the rivals that CNPC outbid, said it was unable to match the Chinese company and didn’t offer to build a refinery.
“CNPC is the representative of a government and it was able to offer terms that were non-commercial,” said Veronica Zhuvaghena, a spokeswoman for Tethys in London.
Buccaneer Energy dropped out “a few months ago” after making “an indicative offer,” Finance Director Dean Gallegos said by telephone from Sydney, where the company is based.
Chinese state companies are not free to ignore commercial concerns, said Brautigam, author of ‘The Dragon’s Gift: The Real Story of China in Africa’ and a professor at American University’s School of International Service in Washington. “Such companies mining copper in the Democratic Republic of Congo built roads and ore-processing plants paid for by the value of the copper,” she said.
China Metallurgical won the right to mine the Aynak copper deposit by offering to invest $2.9 billion, 70 percent more than the second-place bidder, Canada’s Vancouver-based Hunter Dickinson Inc., Afghan mines ministry figures show. That offer was “about $1 billion too large,” Bob Schafer, vice president of Hunter Dickinson, said at the time.
The offer included construction of a rail line, a 400-megawatt power plant, a coal mine to fuel it and a smelter for the copper. The rail line may run 800 kilometers, Zou Jianhui, president of China Metallurgical unit MCC Tongsin Resources Ltd., said in an interview in Kabul in February.
Aynak is “is certainly Afghanistan’s biggest” planned investment, Noorullah Delawari, president of the Afghanistan Investment Support Agency, said in a phone interview from Kabul. “China and India will be our biggest partners in developing mineral resources for their economies,” he said.