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2023-01-01 – Historic Sino-Afghan Oil Deal

2023-01-01

Historic Sino-Afghan

Oil Deal

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Sino-Afghan Oil Deal

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On January 6, 2023, the Afghanistan Ministry of Economic Affairs and the Chinese Ambassador to Afghanistan held a joint press conference to announce a historic deal for the first major foreign investment since the Taliban takeover to open up Afghanistan’s potentially vast energy and mineral resources. While the initial investment by the Xinjiang Central Asia Petroleum and Gas Company is a relatively paltry $150 million, it demonstrates what western analysts have feared – China will bypass western sanctions against the Taliban to secure access to critical energy, lithium and other rare earth minerals, and conversely, the Taliban has opened the door to obtain much-needed foreign currency to support an economy teetering on the brink of disaster.
SINOLOGIX Staff
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2023-01-02
Weekly Recap for: 2023-01-01

Economic Outlook

Global Economic Indicators

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Data Source – World Bank

Economic Recap

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Style too own civil out along. Perfectly offending attempted add arranging age gentleman concluded. Get who uncommonly our expression ten increasing considered occasional travelling. Ever read tell year give may men call its. Piqued son turned fat income played end wicket. To do noisy downs round an happy books. Ought these are balls place mrs their times add she. Taken no great widow spoke of it small. Genius use except son esteem merely her limits. Sons park by do make on. It do oh cottage offered cottage in written. Especially of dissimilar up attachment themselves by interested boisterous. Linen mrs seems men table. Jennings dashwood to quitting marriage bachelor in. On as conviction in of appearance apartments boisterous.

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Sino-Afghan Oil Deal

Background - USGS 2011 Study

In addition to military operations during the US-Afghan War, the US Department of Defense, in partnership with the US Geologic Survey, conducted an in-depth assessment of Afghanistan’s energy and mineral resources. The conclusion, according to a DoD memo issued in 2010, was that “Afghanistan is the Saudi Arabia of lithium”, implying that Afghanistan could become a critical link in the EV manufacturing supply chain. Notwithstanding the inherent limitations of field surveys in the middle of a war zone, such an assessment is quite interesting, in light of the projected demand for lithium and other rare earth metals needed for EV battery production.

The world of lithium mining is rapidly changing, both in terms of discovery of new reserves and advancements in mining techniques, so it remains to be seen whether Afghanistan will realize its potential as an integral component of the global lithium supply chain.

In addition to lithium deposits, the USGS identified approximately 1.6 billion barrels of crude oil, 16 trillion cubic feet of natural gas and another 500 million barrels of natural gas liquids. Hypothetically, that would place Afghanistan 36th in the list of petroleum-producing countries, and 64th in the list of natural gas-producing countries.

Also relevant to potential trade deals with China are substantial valuable metal reserves, building materials, and industrial mineral resources – the DoD / USGS estimated in 2010 that the total value of the above resources exceeded $1 trillion.

However, even prior to the Taliban takeover in 2021, exploiting these resources has been highly problematic, due to Afghan’s extremely mountainous terrain and security concerns amidst ongoing conflict. As discussed in the SINOLOGIX Analysis below, Afghanistan’s inability to monetize its natural wealth has exacerbated the country’s economic instability post-Taliban takeover – FDI is key to Afghanistan’s economic survival.

Afghan Resources

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Data Source – Afghan Ministry of Mines and Petroleum 

Deal Overview

Xinjiang Central Asia Petroleum and Gas Company (CAPEIC), a subsidiary of China National Petroleum Corporation (CNPC), have agreed to a 25-year contract with the Taliban government to provide exploration, drilling, production, and refining services in five oil and gas blocks in a 4,500 km2 area of northern Afghanistan. Oil reserves in the fields under contract are estimated at 87 MMbbl (million barrels of oil).

CAPEIC has committed to an initial $150 million investment, which is expected to increase to $540 million over the subsequent three years. Production targets start at 4,748 bbl  and grow to 23,747 bbl per day. CAPEIC will also be responsible for construction of an oil refinery. Under the agreement, the Taliban government will receive 15% royalty fees for all oil produced.

This agreement is similar to a previous agreement awarded to CNPC in 2011 by the US-backed government, but the deal fell through due to lack of progress. Therefore, the Afghan government has a contingency option to terminate the project if CAPEIC does not meet its performance obligations under the contract.

It’s worth noting that, while Afghanistan is currently awash in economic turmoil, the military conflicts that prevailed from 2001 through 2021 have subsided – during the original project, China had registered concerns that the conflicts impeded its CNPC/CAPEIC’s ability to execute its obligations (under the terms of the 2011 contract).  However, its chances for success this time are considerably higher than in 2011.

Furthermore, this is China’s first major investment in Afghanistan since the war ended and perhaps more significantly, its first major investment since Chairman Xi Jinping launched the Belt and Road Initiative in 2013. So it’s likely this project has more visibility than the previous 2011 contract.

Other Deals in the Pipeline - Lithium

In late 2021, representatives from five Chinese companies met with the Taliban government to discuss potential mining projects in Afghanistan – of particular interest to the Chinese companies were Afghanistan’s lithium reserves, which are among the largest in the world. Representatives conducted on-site inspections of potential lithium projects. However, Tianqi Lithium Corporation and Ganfeng Lithium Company, China’s leading lithium extraction companies, have not formally commented on the outcome of the 2021 meetings.

SINOLOGIX Analysis

Oil Deal

The expected output from the Sino-Afghan contract, even at full production of 23,747 bbl per day, is dwarfed by China’s massive 10.8 MMbbl per day total imports. Meaningful projections of Afghanistan’s domestics oil requirements are not yet available, as the country’s economy has ground to a halt.

However, as of 2016, when the US military was able to provide some level of stability, Afghanistan consumed 35,000 bbl per day of oil, all of it imported. If it were to resume that level of consumption, the CAPEIC would only provide 65.7% of Afghanistan’s daily oil demand.

Implications - China - Energy Security

In the short-term, oil from the CAPEIC project will have no impact on China’s overall energy security, as it’s likely to be consumed entirely by domestic customers.

Afghanistan’s proven oil and natural gas reserves have not been established – rough estimates peg oil reserves at less than 2 Gbbl (billion barrels), and natural gas reserves at 1.75 Tcf (trillion cubic feet). Therefore, it’s unlikely that China’s investment is intended to mitigate energy risk.

China Oil Imports by Country (2021)

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China Oil Importsby Country (2021)

Data Source – World’s Top Exports

Implications - China - Lithium

China is the world’s leading producer of lithium-ion batteries, with a 2021 market share of 79%. However, that number is expected to decline to 65.2% by 2025, as other countries, notably those in the EU, gain access to raw materials and complete their manufacturing build-out.

Currently, Australia and Chile account for nearly 70% of all lithium mining, with China picking up 28% (2020). But China currently controls 60% of the world’s lithium processing capacity. As with most other mineral resources, China will need secure unprocessed lithium supply chains to maintain its market share of lithium battery production.

It remains to be seen whether the US DoD’s 2011 assessment that Afghanistan is the “Saudi Arabia of lithium”, but its certain that China is the leading candidate to tap Afghanistan’s mineral reserves.

Implications – China – Political

The contract is more meaningful in a political context – merely one and half years after the US abandoned military operations in Afghanistan, China has emerged as a legitimate trading partner and asserted its presence in a former war zone where the US spent more than $2.3 trillion before completely withdrawing all personnel:

  • Afghanistan is proximate to the announced oil and gas pipelines linked to the Belt and Road Initiative (BRI). While this first investment is miniscule relative to the overall $7 trillion BRI budget, it further cements China’s footprint in Central-East Asia.
  • China’s cordial and tolerant relationship with the Taliban government is a slap in the face for the US, which has abdicated its role as the primary offsetting influence to temper the Taliban’s strict Islamic policies. In fact, a hallmark of China’s “pragmatic foreign policy” is its indifference to the political ideologies of its trading partners.
  • As with the recent Sino-Saudi summit, China’s emerging global diplomatic footprint stands in stark contrast to some of the recent failures of US foreign policy.
  • Perhaps most importantly, China’s assistance to a hard-liner Islamic regime may offset the bad press and ill-will engendered by its treatment of Xinjiang Muslims. To the extent that the US and other western countries have condemned China’s human rights violations in Xinjiang, one can only assume that Islamic states in the Middle East and Central Asia have been even more outraged by its policies.

Implications - Taliban

Under the US sanctions (re) instated after the fall of Afghanistan to the Taliban in 2021, some $7 billion in foreign reserves have been seized, leaving the current government with few options to pay for desperately needed international supplies. Although the scope of sanctions is not clearly defined, they’ve had a chilling effect on governments’, commercial operations’, and NGO’s willingness to do business with the Taliban.

While the initial $150 million investment in the CAPEIC project will marginally improve employment in the northern provinces where drilling and refining will operate, it’s only a small step in the arduous task of priming the Afghan economy.

But China has demonstrated a nimble posture toward FDI for strategic partnerships and it’s possible that its  investments in Afghanistan may accelerate, especially with regard to lithium projects.

NOTES

References and Disclaimers

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Works Referenced

Azevedo, Marcelo, et al. “Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution.” McKinsey & Company, McKinsey & Company, 5 Aug. 2022, https://www.mckinsey.com/industries/metals-and-mining/our-insights/lithium-mining-how-new-production-technologies-could-fuel-the-global-ev-revolution.

Breiter, Andreas, et al. “Power Spike: How Battery Makers Can Respond to Surging Demand from Evs.” McKinsey & Company, McKinsey & Company, 23 Dec. 2022, https://www.mckinsey.com/capabilities/operations/our-insights/power-spike-how-battery-makers-can-respond-to-surging-demand-from-evs.

Cen.acs.org, https://cen.acs.org/energy/energy-storage-/Challenging-Chinas-dominance-lithium-market/100/i38.

Najafizada, Eltaf. “Chinese Miners in Talks to Access Vast Afghan Lithium Reserves.” Bloomberg.com, Bloomberg, 24 Nov. 2021, https://www.bloomberg.com/news/articles/2021-11-24/chinese-firms-show-interest-in-afghanistan-s-mineral-reserves.

News, VOA. “Explaining US Sanctions against Taliban.” VOA, Voice of America (VOA News), 5 Feb. 2022, https://www.voanews.com/a/ready-explaining-us-sanctions-against-taliban-/6427771.html.

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China GDP vs UST Holdings (2010-22) (billions)

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China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

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Style too own civil out along. Perfectly offending attempted add arranging age gentleman concluded. Get who uncommonly our expression ten increasing considered occasional travelling. Ever read tell year give may men call its. Piqued son turned fat income played end wicket. To do noisy downs round an happy books. Ought these are balls place mrs their times add she. Taken no great widow spoke of it small. Genius use except son esteem merely her limits. Sons park by do make on. It do oh cottage offered cottage in written. Especially of dissimilar up attachment themselves by interested boisterous. Linen mrs seems men table. Jennings dashwood to quitting marriage bachelor in. On as conviction in of appearance apartments boisterous.

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