Afghanistan Waits for Oil Boom

10/08/2012 11:30 am EST


Some 1.9 billion barrels of oil are said to lie under Afghanistan's soil, but their future remains uncertain, writes April Yee of The National.

With foreign aid set to decline and NATO forces soon to withdraw, what hope there is in Afghanistan lies under the ground. But much of those mineral riches are likely to remain out of reach for the near future.

Last week, the apparent exit of ExxonMobil (XOM) from the group of companies vying for oil rights in the Tajik Basin signaled a waning appetite among top-tier investors to take on operations in a place with deteriorating security, a lack of infrastructure, and a reputation for corruption.

"It is difficult to see Afghanistan benefiting from the exploitation of its natural resources in the near or medium term," says Claudine Fry, the regional analyst for Control Risks, a risk consultancy in London. "The extraction of oil in large quantities is a long-term prospect at best, given the security, political, and operational challenges facing investors."

The apparent indifference of the world's largest non-state oil company is a bleak sign for a country with an uncertain future.

Yet there is so much potential in Afghanistan. Indeed, by some measures, a nascent oil rush is already taking off in the country.

Companies from around the world, including the UAE, are due to submit bids for oil exploration this month. Soon after, Afghanistan is set to start pumping oil in small but commercial quantities for the first time in its history, the first drops of 1.9 billion barrels of recoverable reserves estimated to lie underground.

The total value of the nation's natural resources—from gold to lithium to iron ore—has been estimated at $1 trillion.

For a model of how to get that wealth out of the ground and into the economy, Afghans can look to the Kurdistan region of Iraq. When it emerged from Iraq's most recent war, Iraqi Kurdistan was untapped like Afghanistan, and likewise without reliable roads, electricity, or other key infrastructure.

Small independent operators, wooed by lucrative contracts from the Kurdish authorities, started pumping oil in the face of a blacklisting policy enforced by Iraq's central government.

ExxonMobil joined them last year with six exploration licenses, and the move was taken as validation for the independents and the regional government alike, as well as a green light for other oil majors such as Chevron (CVX) and Total (TOT) to follow—which they soon did.

So when the Afghan mining ministry announced in July that ExxonMobil was among the companies shortlisted to bid for a Tajik Basin concession, it was a ray of hope for the fledgling oil sector.

Until then, Afghanistan had awarded only one concession—to China National Petroleum Corporation and a company controlled by relatives of the president Hamid Karzai—half a year earlier.

That mood changed last week, when Wahidullah Shahrani, the mining minister, revealed that ExxonMobil had not taken up an invitation to visit the concession area. With the deadline to submit bids at the end of this month, the statement was taken as a sign that not just ExxonMobil, but other Western oil majors would shy away from Afghanistan.

ExxonMobil declined to say if it had visited the site or if it intended to bid. "As a matter of practice, we do not comment on lease sales until the final results have been released by the government," said Patrick McGinn, an ExxonMobil spokesman.

That comes as Anders Fogh Rasmussen, the NATO secretary general, signals that forces could withdraw earlier than their 2014 timetable.

Security concerns are even holding up Chinese efforts to extract copper, a sign that non-Western corporations are not immune to the risks. Among the companies shortlisted to bid in the forthcoming oil rights tender is Dragon Oil, the operator that is majority-owned by Dubai's Emirates National Oil Company.

"The future stability of Afghanistan has been plunged further into doubt, as militants have demonstrated enduring strength with continued operations, 'green-on-blue' attacks have forced a slowdown on the training of Afghan security forces, and talks with the Taliban have stalled," says Fry.

"Green-on-blue" is a reference to attacks on Nato forces by rogue members of the Afghan security forces.

"Security concerns are reportedly slowing progress at the Aynak copper mine in [the Afghan province of] Logar, which is being developed by the Chinese, which is telling," she continued.

The threats to the sector are compounded by delays to a mineral extraction law designed to attract Western investment, which some local critics said was too favorable to Western interests.

Such laws, along with initiatives to monitor mining operations and profit flows to the government, are needed to build an extractive sector that will function in the long term, says Juman Kubba of Global Witness, a non-profit organization that aims to stop conflict in resource-rich nations.

"As people are thinking about [NATO's] withdrawal, they are thinking about alternatives to aid, and the extractive sector is the one bright spot by the government and by the international community," says Kubba. "So there's a lot of pressure to get a lot of deals signed as soon as possible.

"Your focus needs to be on creating the right foundation for Afghanistan, so just getting deals out the door isn't the right attitude."

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