The ambassador, the Post & consultant fatigue – how Afghanistan’s oil stays in the ground

Natural resources have a long and proud tradition of conspiracy theories – with the rider of course that dozens of those theories are true. The CIA really did overthrow the government of Mossadegh in Iran in the 1950s after he nationalised the oil industry by using $100,000 to buy rent-a-mobs on the streets of Tehran to reinstate the Shah. Calouste Gulbenkian really did found a cabal which sat on Iraqi oil for decades, not producing it to keep prices up elsewhere. Marc Rich sold Iranian oil to Israel for many years, the pattern of OPEC reserves bear no relation to a continuous process of discovery and depletion if you chart them on a graph, and whether or not Peak Oil is actually coming soon, governments are a lot more worried about it than they let on.

So it’s refreshing when you get to hear an inside story of chaos as well as conspiracy. Recently, I had lunch with someone who’s spent much of the last few years advising the Afghan government on its natural resources. She relates a comedy of errors which led to the country’s first oil and gas licensing round last year ending with no result.

A lot of attention became focused on the country’s sector, of course, after the US Geological Survey re-released figures stating staggering potential in minerals in the country (why they reworked old data and published exactly when they did remains a mystery unless we factor US domestic politics into it). But the oil story is just as interesting in its own way, especially for the insight it gives into how randomly decisions can be made in a low human-resource country like Afghanistan

There’s been a known resource in Jowzjan in the north-west of the country since the Soviet occupation in the 1980s. In fact the Soviets, bless them, carried out detailed cartography and geological surveys of all kinds in the 1970s, just a few short years before they decided to invade. Geologically, the area is an extension of the Amu Darya basin which extends into Turkmenistan, where of course, there are large gas deposits.

Inside Afghanistan there are at least 200 million barrels of crude proven (P1) and 52 billion cubic metres of gas in three blocks of just under 2,000 square kilometers. The gas is enough to power a significant part of the country for a long time and the crude oil, at current prices, could earn the government about $8 billion – or about five solid years of budget. At the much higher USGS figures from June, a mean prediction of 1.5 billion barrels of crude and 440 billion cubic metres there would be enough hydrocarbons to power the country’s electricity needs and finance the state budget for the best part of a generation.All this has been known and documented for a long time. It’s on the ministry’s website right now.

The international community spent a lot of effort trying to get the regulatory environment right. Efforts to reform a 2005 law began almost as soon as it was passed, failed in 2007 and succeeded in 2009. Meanwhile the minister, Mohammad Ibrahim Adel, was ethnically Hazara, which had the unfortunate consequence that he didn’t speak to the Electricity Minister Ismail Khan, the former Tajik warlord of Herat.

He also suffered from a surfeit of consultants. There may have been up to 30 reports on different aspects of the oil industry sitting in the ministry by 2007, none of them informed by the others.

Eventually, in 2008, an agreement was struck between USAID and the Asian Development Bank who were to spend $12 million each to develop the fields using Turkish teams to bring in the drilling apparatus. The team rumbled over by truck from Turkey but were held up at the Turkmenistan-Afghanistan border for several months over the Afghan winter, the Turkish engineers all sleeping in their trucks. The implication here is that a customs official was looking for a sweetener which didn’t come. This carried on for several months until the bill for the Turkish team reached $8 million – and they hadn’t even arrived on site. Then Karl Eikenberry, the former general in charge of US forces in Afghanistan arrived as ambassador. Presented with a list of projects that were ongoing, he scrapped the oil and gas development in Jowzjan – and the Turkish team at the border had to wend their weary way home back across Central Asia and the Caucasus.

Next, later in 2009, with new legislation in place, the Afghans set about holding an auction. I believe they had some 2D seismic data and a fiscal regime which mixed royalties with signature bonuses and sliding scale of government take increasing once the companies had completed cost recovery – fairly standard stuff. But although 6 companies pre-qualified, only one made a bid in the end – which was rejected. Why the lack of interest?

The Afghan government defined a process by which only single companies could bid, not consortia, going against the industry practice of consortia in new and/or precarious environments. They did this apparently because of their desire to have clarity in the relationship with their counterparts, misunderstanding the nature of a consortium. The fact is, it is standard in such arrangements for the largest equity holder in the joint venture to be the “operator”, and legal counterpart of the government. At this point, my source blames herself, saying that she did explain this point in discussions with the minister and his civil servants, but she did not check if it had been clearly understood.

Matters were not helped by the fact that the auction round ran at exactly the same time as the 2009 presidential elections, when the international community spent many weeks trying to decide if it was going to continue to recognise Hamid Karzai as president after all the shenanigans. And then the minister was denounced as corrupt by an article in the Washhington Post which quoted two unnamed sources, and had to resign. The new minister started from scratch and so once again consultants from half a dozen different organisations beat down his door to offer a fresh round of reports and position papers.

And here’s the kicker. The Chinese are obvious players in Afghanistan’s natural resources, and in fact hold the country’s current major mining concession in Logar province. They’re technically a neighbour, though the tiny shared border is right at the end of the Wakhan Corridor. And the Iranians are the natural source of expertise, being as how they’re just over the border, run a world scale export industry – and share a common language after all, Farsi and Afghan Dari being merely different dialects of the same language. But the Americans and perhaps also the Brits have been very reluctant to follow the natural logic of industry development because of their obvious nervousness over the geopolitical implications of Chinese and Iranian involvement in an industry which could supply the entire state budget for many years.

Of course, the industry faces many other obstacles. Afghanistan could be described as “deep onshore”, suffering the same concentration of risk and expense to get crude out for export as deep offshore does for different reasons. A pipeline to get crude out to the sea, for example, would need to traverse not only the Afghan south but also Baluchistan in Pakistan – a sitting duck for the Taliban. Even bringing gas to Afghan power stations is fraught with danger, although some pipelines exist running into Mazar and the population concentrations on the northern plains.

There’s supposed to be another auction round in the next 12 months or so. Meanwhile the development of the industry has been held up for a couple of years by, amongst other things, the vagaries of US staff rotation, incomplete power point presentations and an anonymously sourced article in the New York Times.

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