Exploration Advances In The Face Of Security, Governance Challenges

BMI View: Formal approval of a contract for two blocks in Afghanistan highlights interest in the country's prospective but importantly relatively more stable northern areas. However in light of continued challenges relating to security and governance, we see high risks that interest in Afghanistan's resource potential may well fail to overcome such concerns .

Afghanistan's Ministry of Mines and Petroleum announced a formal contract for two blocks, Sanduqli and Mazar-i-Sharif . The blocks were issued under the Afghan-Tajik Phase 1 Oil & Gas Tender and awarded to a consortium comprised of Dragon Oil (40%), TPAO (40%) and Afghan based Ghazanfar Group (20%) . The exploration areas border Turkmenistan and Uzbeki stan and while exploration in the area to dat e has been limited, a recent 2D survey conducted by the Afghan Ministry of Mines points to the presence of potentially commercial quantities of hydrocarbons in the Afghan-Tajik Basin.

Sizable oil and gas deposits are thought to have accumulated in the Cretaceous and Jurassic horizons of the basin, which is located between the cities of Mazar-i-Sharif and Kunduz. Afghan officials also cite the region's pre-salt potential while noting geological similarities to proven hydrocarbon plays in neighbouring Uzbekistan, Tajikistan and Turkmenistan.

Natural Resources May Offer Best Hope For Cash
Afghanistan Total Expenditure & Revenue, US$bn

BMI View: Formal approval of a contract for two blocks in Afghanistan highlights interest in the country's prospective but importantly relatively more stable northern areas. However in light of continued challenges relating to security and governance, we see high risks that interest in Afghanistan's resource potential may well fail to overcome such concerns .

Afghanistan's Ministry of Mines and Petroleum announced a formal contract for two blocks, Sanduqli and Mazar-i-Sharif . The blocks were issued under the Afghan-Tajik Phase 1 Oil & Gas Tender and awarded to a consortium comprised of Dragon Oil (40%), TPAO (40%) and Afghan based Ghazanfar Group (20%) . The exploration areas border Turkmenistan and Uzbeki stan and while exploration in the area to dat e has been limited, a recent 2D survey conducted by the Afghan Ministry of Mines points to the presence of potentially commercial quantities of hydrocarbons in the Afghan-Tajik Basin.

Afghan-Tajik 2012 Licensing Round
Block name Area (sq km) Wells drilled Structures identified
Source: Deloitte
Ahmadbad 1,855 2 6
Balkh 1,861 6 11
Mazar-I-Sharif 2,715 1 10
Mohammed Jan Dagar 3,603 10 19
Sanduqli 2,583 3 9
Shamar 2,143 0 13

Sizable oil and gas deposits are thought to have accumulated in the Cretaceous and Jurassic horizons of the basin, which is located between the cities of Mazar-i-Sharif and Kunduz. Afghan officials also cite the region's pre-salt potential while noting geological similarities to proven hydrocarbon plays in neighbouring Uzbekistan, Tajikistan and Turkmenistan.

The Afghan-Tajik Basin, is thought to be liquids rich, while another prospective northern area, the Amu Darya basin where China National Petroleum Corp (CNPC) was awarded several blocks in 2011, is thought to be gas rich. According to the United States Geological Survey (USGS), the two areas are among four plays in Afghanistan that may have hold up to 1.6bn barrels (bbl) of crude, 448bn cubic meters of gas and 500mn bbl of NGL's.

Challenging Prospects...

That the blocks are located in Afghanistan's north, which has proven to be more stable from a security perspective than more volatile areas in the south and east, bodes well for the prospects that exploration activity across the blocks will be able to advance. However security in the region will now be tested, as German forces operating under the broader NATO mission recently handed over responsibility for the region to local Afghan forces as part of a broader handover ( see, 'Major Obstacle To Peace Talks,' July 26 ) .

R ecent incidents highlight the extent of challenges oil and gas exploration efforts are set to face as the country's potential is further tested. In late 2012, CNPC was forced to halt exploration efforts following attacks by local militias while in August activities were interrupted following a dispute with Uzbekistan over the transit of crude through the country en route to China. With NATO forces set to continue handing over greater responsibility to local forces, security could prove even more volatile than present , leading to more frequent interruptions .

Moreover institutional weakness, with Afghanistan for example ranked last place at 174th with Afghanistan - alongside North Korea and Somalia - in Transparency International's Corruption Perceptions Index for 2012; operators are likely to confront other above gro und challenges.

...May Limit Interest In Resources

Natural Resources May Offer Best Hope For Cash
Afghanistan Total Expenditure & Revenue, US$bn

Afghanistan's vast resource wealth - with the country thought to be rich in minerals as well as oil and gas - may provide the best hope of the country funding itself given its high reliance on international aid and revenues associated with a large foreign presence that is due to shrink in the coming years. However attracting more investment will require greater confidence in security, as oil and gas firms are often adept at dealing with a lack institutional capacity or challenges associated with poor governance, but are more reluctant to tolerate prolonged risks to personnel.

While Afghan officials have said they hope for 'extraction activities' in the Afghan-Tajik basin to begin within 3 - 5 years, we expect delays and challenges in line with those seen by CNPC and in the mining sector more generally, where Kabul hopes to eventually earn some US$4bn annually but managed to net less than US$150mn in 2012. A lack of oversight and government capacity, underscored by a recent explosion at a state run coal mine and battle over the control of resources - with local warlords for example pressing CNPC for illegal pay offs - reflect conditions that may well worsen as the pull out of foreign forces reduces available revenue streams.

Moreover with Afghanistan's northern neighbours offering more stabile operating environments and access to the same resource plays from their side of the border, we may well see interest and investment move elsewhere should Kabul fail to sustain the recent attention is hydrocarbons sector has managed garner.

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