China takes a bold step in Afghanistan

Two of three big projects are run by mainland companies because Westerners are not prepared to take the risks in the country

PUBLISHED : Wednesday, 05 December, 2012, 12:00am
UPDATED : Wednesday, 05 December, 2012, 3:12am

While the West is pulling out of Afghanistan, China is scouting out the strife-torn country's natural resources, estimated to be worth trillions of US dollars.

Last year, Afghanistan's Ministry of Mines declared that 30 per cent of the country's land contains US$3 trillion of mineral resources. Getting the wealth out of ground, however, poses big political and security risks.

"The country is known to have valuable deposits in gold, copper, lithium and rare earth," said Juman Kubba, a campaigner for Global Witness, a British non-governmental organisation.

Resource-hungry China, not surprisingly, is one of the big mining players in the country.

"Chinese companies are willing to take risks where other countries are not," Kubba said. "Because of that, Chinese companies have a good chance of winning more contracts in Afghanistan. There are three big mining projects in Afghanistan and two have gone to China, so that is a hugely dominant role."

They are the Aynak copper deposit in Logar province, the oil reserves in Amu Darya and the Hajigak iron deposit in Bamyan province.

Chinese state-owned companies control the Aynak copper mine and Amu Darya oil field, while an Indian consortium controls Hajigak, Kubba said.

According to the World Bank, revenue from the Aynak copper mine and Hajigak iron deposit will generate US$900 million per year until 2031.

"To date, Western firms have largely avoided large commercial investments in Afghanistan due to the country's security situation," said Hugo Williamson, managing director of the Risk Resolution Group, a British risk consultancy.

"By contrast, Chinese companies have been less risk-averse, investing in the oil and mineral resource sectors. The activity of US firms in Afghanistan has been limited," he said.

In 2008, the Afghan government signed a contract with a Chinese state-backed consortium to mine the country's largest copper mine in Aynak district, Logar province.

The consortium is 75 per cent owned by Metallurgical Corp of China (MCC) and 25 per cent owned by Jiangxi Copper, both listed in Hong Kong.

To date, Aynak is the biggest private investment in Afghanistan and China's biggest investment in the country, said the policy head of the Afghan Ministry of Mines, Ghazaal Habibyar.

The deal is expected to generate US$541 million per year for the Afghan government from 2016, create 5,000 jobs and bring in infrastructure investment, according to the World Bank.

The Chinese consortium is granted the right to a copper deposit estimated to contain 240 million tonnes of material with a reported value of US$43 billion.

In return, the consortium provides investment worth at least US$2.9 billion, including payment totalling US$808 million in three instalments plus investment in projects like the construction of a railway, a power plant and water supply.

Since the Aynak deal was signed details of the contract have been kept confidential until Global Witness recently disclosed them.

"The local people are not happy because they have not seen the contract. They don't know what they are going to get. The deal looks good for Afghanistan but the details are not so good," said Kubba.

The contract allows the Chinese party to negotiate down the royalty they pay the Afghan government, Kubba revealed.

It also allows MCC to deploy private security forces at the Aynak mine, which is unusual because such forces are prohibited on other deals, Kubba said.

In its third quarter report, MCC said the worsening safety situation at Aynak has delayed work on the mine.

Recently, more than 170 Chinese workers fled the copper mine after a rocket attack but at least 150 have returned.

MCC did not respond to the South China Morning Post's questions.

The contract gives the Chinese consortium six months exclusive rights to all natural resources within the Aynak area, including coal, timber and water, said the Global Witness report.

"It's very unusual for one company to have the rights to all natural resources," said Kubba.

In December 2011, an oil contract for the Amu Darya basin was awarded to a joint venture between China National Petroleum Corp (CNPC), the biggest Chinese state-owned energy firm, and Watan Oil and Gas, an Afghan firm.

The contract allows for an exploration period of 4.5 years plus a production period of 25 years. For the first five years after the contract date, Amu Darya is required to produce at least 12.3 million barrels of crude oil, according to the contract.

Given that one barrel of crude oil is worth roughly US$100, 12.3 million barrels translates to a value of US$1.23 billion over this five-year period.

The Amu Darya basin contains at least 80 million barrels of crude oil reserves, according to the contract.

"The US and UK are beginning to withdraw from Afghanistan. Now the Asian players are coming in, mainly from India and China. China and the US are changing places," said Kubba.

"China has invested in infrastructure projects in Afghanistan and secured lucrative contracts in the natural resource sectors, which is seen by many in Washington as China benefiting unfairly from the US presence in Afghanistan. This has caused tensions between the two countries," said Williamson.

In September, China's then security chief, Zhou Yongkang, visited Afghanistan and signed agreements on security and economic co-operation, including a deal to train, fund and equip Afghan police.

With the 2014 Nato withdrawal approaching, China is contributing to stability in Afghanistan, Williamson said.

"This is driven by China's concern that once US troops leave, increased instability in Afghanistan will enable Uygur separatists to play a greater destabilising force in Xinjiang region," he said.

"We are likely to witness greater co-operation between the US and China to bring stability in Afghanistan. This … is likely to override tensions between the two countries over China's increasing economic presence in Afghanistan," Williamson said.