This post is by Heather Croshaw, a second year law student at Vermont Law School and a joint-research project student with the US-China Partnership for Environmental Law for 2011-2012.
China’s hunt for more natural resources drives them to new corners of the world. Many western companies have already exploited resources in the Middle East, Africa, and the Americas. As a result, China has to look elsewhere for securing energy resources, in countries not already tied to western corporations.
China invests in post-conflict countries to secure natural resources for their energy-hungry economy, such as the formation of China Sonangol in Angola in 2004. Angola is now China’s major source of foreign oil, along with Saudi Arabia. While other countries focused on post-conflict aid, China focused on trading resources for infrastructure (RFI). Also known as the Angola Model, China’s trade deal with Angola began a new method for development in post-conflict countries, rather than the traditional foreign direct investment by corporations or bilateral or multilateral foreign aid projects. In other words, Chinese corporations are providing “hard aid,” instead of Western “soft aid.” Post-conflict countries, in particular, need infrastructure to begin the rebuilding process.
China has received a lot of international attention for investing in resource-rich countries, particularly those emerging from violent conflicts. These countries, with cash-strapped, weak governance regimes and low security, face strong challenges to attract foreign direct investment. Natural resource concessions often provide a way to get capital flowing into a post-conflict country quickly. Also, any concessions given before the war or during are usually void or cancelled, or the country had no idea what kinds of riches it possessed. Such is the case with Afghanistan.
FP – In 2009, the [Pentagon's Task Force on Business and Stability Operations] commissioned the U.S. Geological Survey to conduct a comprehensive review of Afghanistan’s geological riches, the preliminary results of which were announced in 2010 and showed that Afghanistan might contain more than $1 trillion in mineral wealth.”
According to this survey, Afghanistan possesses vast natural resource wealth, including reserves of natural gas, oil, and lithium. While the country remains a high security risk, the allure of natural resource exploitation provides a strong incentive to attract foreign investment as quickly as possible. China, who needs access to natural resources, looked to Afghanistan. Part of the allure of Chinese foreign direct investment is that it helps wean Afghanistan off foreign aid.
Reuters – But the rich mineral reserves lying untapped in Afghanistan after decades of war are a tempting and potentially lucrative lure for resource-hungry China, whose companies have already shown an ability to operate profitably in hostile environments.”
Then, in September 2011, the Afghan Ministry of Mines awarded a contract for petroleum development, the first since the U.S. invasion in 2001, to state-owned China National Petroleum Corporation (CPNC). The contract for the three blocks, part of the Amu Darya Tender, includes the right to develop three oil fields, Kashkari, Bazarkhami and Zamarudsay blocks, speculated to hold approximately 80 billion barrels of oil.
Energy-pedia – The deal covering drilling and a refinery in the northern province of Sar-e Pul is the first international oil production deal entered into by the Afghan government for several decades. It marks another landmark deal for the Chinese investors in Afghanistan after Metallurgical Corp of China (MCC) signed a contract in 2008 to develop the huge Aynak copper mine south of Kabul, due to start producing by the end of 2014.”
On October 20, 2011, CPNC and the Afghan government reached a final agreement. The Chinese investment in the first two years of the project will yield $200-$300 million. The final agreement also includes building an oil-refinery in the region. China’s involvement in Afghanistan steadily grows, as they already have a mining deal in place from 2008. In this latest deal, CPNC beat Western companies in the bidding process. As China becomes a larger energy player, their corporations will very likely continue to win contracts over Western-based corporations. This has become the new extractive industries reality.
While some have criticized the bidding process, the Pentagon and task force seemed content with the outcome. The Pentagon’s Task Force on Business and Stability Operations helped the Afghan government write their laws on hydrocarbon development and those for contract bidding. According to the Pentagon’s criteria, CPNC followed the rules. The statement from the Pentagon partly reads:
The Hydrocarbons Law of the Islamic Republic of Afghanistan requires that oil and gas production sharing contracts be awarded by a competitive, transparent tender process… CNPC International was the highest bidder, at 15 percent royalty, and the only bidder whose bid conformed to the tender rules…Upon approval of the contract by the Council of Ministers, a summary of the tender and the evaluation process will be published according to Afghan law and the report of the transparency consultants will also be made public.”
This contract adds to China’s growing number of operations in Afghanistan, totaling to nearly 40 projects worth $500 million. But their reward does not come without risks. China understands that investing in Afghanistan poses great security risks to their ex-patriots, but the Chinese will not be deterred.
Also, the Afghan law continues the implementation of the Extractive Industries Transparency Initiative (EITI) by publishing the report of the transparency consultants, as Afghanistan is an EITI candidate country. Thus, it will be crucial for China to comply with Afghan laws to ensure they continue their EITI validation process.
The U.S. may be helping write the laws in Afghanistan, but China seems to be reaping the economic benefits. As long as the contract bidding process remains transparent and competitive, Chinese companies seem to have the upper hand, a continuing trend from other parts of the world. What will be interesting going forward, when the contents of the contract will be disclosed, is whether this deal includes an RFI provision that will benefit the Afghan people for the long-term.
