The Agenda

Alexander Benard and Eli Sugarman on Afghanistan’s Mineral Wealth

Foreign Policy has published a short piece by two principals at Gryphon Partners, and advisory and investment firm focused on the Near East, on a little-noticed recent event:

In about a week, the Afghan Ministry of Mines will announce that the China National Petroleum Corp. (CNPC) — the largest state-owned Chinese company — has won the rights to develop and explore several oil fields in the Amu Darya basin in northern Afghanistan.

How was CNPC able to win a tender for such a strategic resource in a country where the United States wields tremendous influence? Amazingly, one reason is that the U.S. Defense Department, whose Task Force on Business and Stability Operations, which is charged with resuscitating the economies of Afghanistan and Iraq, designed and oversaw a tender process that played to the strengths of Chinese state-owned companies over Western private ones.

As Benard and Sugarman explained, the tender process tilted the balance towards a company that was willing to endure heavy losses for an indefinite period of time:

In Central Asia, the norm is for the government to receive roughly one-third of the profit oil and for the oil company to receive the remainder. Yet in Afghanistan — one of the riskiest countries in Central Asia, with incomplete geological data and the near absence of key infrastructure — the task force pushed for a profit split that would give the Afghan government the majority of the profit oil. This was in addition to royalties and several other taxes included in the agreement, all of which are entirely atypical in Central Asia.

We provided the task force with several examples of contract terms in other Central Asian countries and repeatedly asked the task force to identify which countries served as the model for the unattractive commercial terms offered for the Amu Darya tender. The task force refused to answer our question, and the terms remained unchanged, resulting in virtually no interest in the tender among serious Western oil companies. The terms did not deter CNPC, however, which is willing to make investments in Central Asia that are not strictly profitable for the purpose of capturing resources and extending China’s political influence.

The other problem was the process, under which the company that bid the highest royalty would be designated the winner of the tender so long as it met the basic technical requirements for executing the project. It was clear from the beginning that CNPC would bid the highest royalty (especially given that the terms were unattractive to Western companies). Indeed, according to industry experts we consulted, it is common knowledge that CNPC typically bids $5 to $7 per barrel more than other interested bidders in oil tenders in which it participates. So this selection process all but guaranteed that China would win the tender.

There are other selection processes that would have been fairer to Western companies. Notably, a system that allocated a certain number of points for the royalty rate, but then also allocated points for technical qualifications, environmental track record, past performance, quality of the proposed work program, investment in the local community (including hiring of local staff), and other such factors, would have provided far more opportunity for Western companies to showcase their strengths and compete against CNPC. The task force ignored such alternate approaches — even though they were expressly permitted under Afghan law. [Emphasis added]

On one level, this seems like a classic illustration of the core case against anti-dumping: if CNPC is willing to make an investment that is not economically sound, why not allow them to do it and allow the Afghan treasury to reap the benefit? Benard and Sugarman are suggesting that this reflects short-term thinking, as China is not so much “taking a bath” as it is purchasing the right to wield considerable power over the future direction of Afghanistan.