December 28, 2011 / 11:51 AM / in 6 years

UPDATE 1-Afghanistan signs major oil deal with China's CNPC

* Contract to earn govt billions of dollars over 2 decades

* Deal China’s second big venture into Afghanistan (Adds details, links)

By Mirwais Harooni

KABUL, Dec 28 (Reuters) - Afghanistan signed a deal with China National Petroleum Corp (CNPC) on Wednesday for the development of oil blocks in the Amu Darya basin, a project expected to earn the war-torn state billions of dollars over two decades.

The deal covering drilling and a refinery in the northern provinces of Sar-e Pul and Faryab is the first international oil production agreement entered into by the Afghan government for several decades.

“In 30 days from now they will shift their experts and equipment to the site,” Mining Minister Wahidullah Shahrani told a news conference, referring to the CNPC.

“The practical work will start in October 2012.”

The contract is valid for 25 years.

It marks the second major deal for China in Afghanistan after Metallurgical Corp of China signed a contract in 2008 to develop the huge Aynak copper mine south of Kabul, which is due to start producing by the end of 2014.

State-owned CNPC and joint venture partner Watan Group, a diversified Afghan company, will explore for oil in three fields in the basin -- Kashkari, Bazarkhami and Zamarudsay -- which are estimated to hold about 87 million barrels of oil.

For now, CNPC has only rough estimates of how much it is likely to invest in the project, said Lu Gong Xun, president of CNPC’s international branch.

“We can only give you a rough number for initial investment. Based on my experience it should be around ... minimum of $400 million,” he said.

Under the contract, CNPC will agree to pay a 15 percent royalty on oil, a 20 percent corporate tax and give up to 70 percent of its profit from the project to the Afghan government.

CNPC will also pay rent for land used for its operations.

“If the oil price stays at around $100 dollars over the next 23 years and if oil found in those fields is 87 million barrels, we estimate that our income from this project will be at least $7 billion,” the Afghan mining minister said.

THREE TRILLION DOLLARS

Afghanistan hopes revenue from minerals will help pay the bills, especially when a pullout of foreign troops is completed in 2014 and much foreign aid and spending goes with them.

It also hopes projects in the mining and oil sector will cut its reliance on imports from Iran and Central Asian countries.

Indian and Chinese bidders have been front-runners for deals to develop Afghanistan’s mineral deposits, which are valued at up to $3 trillion, worrying Western firms that have hesitated to invest there because of security concerns.

The mines minister said information on bidding rounds for oil blocks in the northern Balkh province will be released at the end of February and for western Herat province by mid-2012.

Experts have warned that mining projects in Afghanistan are likely targets for insurgents, production and transport costs will be high, and sovereign risk is a serious concern.

After decades of conflict, Afghanistan lacks vital infrastructure and has little hope of changing that fast.

The United Nations said this year that violence in Afghanistan was at its worst since the Taliban regime was toppled 10 years ago.

But China and India, where demand for energy and industrial inputs is booming, are willing to take risks to secure supplies.

Sar-e Pul and Faryab provinces are removed from Afghanistan’s main conflict areas. The minister also said that security would be provided for the project. (Editing by Agnieszka Flak and Sugita Katyal)

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