World Review | Challenges facing Afghanistan as it unlocks its oil and gas wealth

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Challenges facing Afghanistan as it unlocks its oil and gas wealth

Challenges facing Afghanistan as it unlocks its oil and gas wealth
Afghanistan's energy wealth is largely unexplored and underdeveloped (photo: dpa)

FOR decades, Afghanistan has captured oil and gas explorers’ interest. But exploration has been hindered by years of conflict and wars, leaving the country’s energy wealth mostly untapped.

During this time, Afghanistan has relied entirely on fuel imports from neighbouring Iran and Central Asian countries - at significant cost.

But in November 2012, the government of the Islamic Republic of Afghanistan accepted a bid from three international oil and gas firms to contract for blocks in its northern region. Along with a contract signed in 2011 with China National Petroleum Company (CNPC), the development highlights the possible beginning of a new, post-war era in Afghanistan. But substantial challenges remain.

Between 1957 and 1984, the Soviets discovered seven oil and eight gas fields in northern Afghanistan. Only four of these fields – one oil and three gas - are currently producing.

Surveys carried out by the US Geological Survey (USGS) assessing oil and gas resources during the 1980s and 1990s in north western Afghanistan and again between 2004 and 2006 found that there were significantly greater amounts than previously thought. Oil deposits were 18 times greater and gas three times greater.

How much of these resources are economically recoverable depends on oil and gas prices, costs and taxes.

From an investor’s perspective, exploration activity carries the highest risk especially because of the geological uncertainty and it is the most capital intensive compared with other activities throughout the petroleum supply chain. And the time between exploration and first production is long, delaying payback. Drilling in Afghanistan is fraught with an added risk of security.

In March 2011, the government’s Ministry of Mines launched a new tender – the Amu Darya Oil Tender 2011 – which focussed on fields in production. The exploration risk was therefore removed.

Three blocks containing five discovered oil and gas fields were offered. In December 2011, the consortium of China National Petroleum Company International and a local company, Watan Oil and Gas, was chosen. The new company, CNPCIW, is expected to produce at least 150,000 barrels of oil in 2012. CNPC became the first foreign company to start oil production extraction in Afghanistan, and is scheduled to build the country's first refinery within the next three years.

In March 2012, the government’s focus shifted back to exploration. Six blocks were offered for tender. Twenty companies submitted interest and in November 2012, the Afghan government accepted a bid from three firms: Dubai-based Dragon Oil, Kuwait Energy, and Turkey’s TPAO. Contracts are expected to be signed in 2013.

These developments bring Afghanistan one step closer to being on par with its neighbours – as a potentially significant oil and gas reserves holder and an attractive destination for international petroleum capital.

Afghanistan has opted for a transparent bidding process, signed up to a voluntary initiative to publish oil, gas and mining payments by companies to governments and vice versa and has published the contract it signed with CNPC.

These steps reinforce transparency and reduce corruption in a country which has traditionally ranked poorly on the Corruption Perception Index. In 2011, it was the 180th out of 183 countries, where 183 is the most corrupt and one the least.

Afghanistan’s petroleum potential is not limited to its domestic resources. The country sits between the oil and gas reserves of the Caspian Basin and major Asian gas consumers. It can become a strategic hub connecting Central Asia to various export routes and markets.

Several trans-Afghan oil and gas pipeline projects have been considered, including the TAPI pipeline project (Turkmenistan, Afghanistan, Pakistan, India). If built, it would transport Turkmen gas across Afghanistan to Pakistan and India. Afghanistan is expected to get around eight per cent of the gas sales revenue in transit fee.

The World Bank recently stated that 'it has been said many times that Afghanistan is at a crossroads. This has never been truer than now'.

Dr Carole Nakhle

Our Expert: Dr Carole Nakhle Dr Carole Nakhle is an energy economist, based in London, UK, specialising in international petroleum fiscal regimes, world oil and gas market developments, a ...

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