China in Afghanistan, a tale of two mines

By Raffaello Pantucci

First published in the Financial Times Beyond Brics December 4, 2012

Picture from here

Facing a heavy domestic agenda and growing foreign policy tensions in the seas to the east, it is unlikely that Afghanistan is going to be a major priority for incoming Chinese leader Xi Jinping.

Unfortunately, this does not mean the problems are going away. The contrasting fates of China’s large extractive projects in Afghanistan highlight a number of growing issues for the new administration in Beijing as the 2014 deadline for American withdrawal imposed by President Obama looms ever closer.

Up in the north, CNPC has started to extract oil from the ground in its project in the Amu Darya basin, while southeast of Kabul at Mes Aynak, the giant copper mine run by Metallurgical Corporation of China (MCC) and Jiangxi Copper has been put on hold while the Chinese firms reassess their ambitious plans for a project described by President Karzai as ‘one of the most important economic projects in Afghan history’.

This state of affairs is quite a contrast to earlier this year, when it emerged that CNPC was facing difficulties on the ground with reports of Chinese engineers being harrassed on site. This was despite the generous terms of the deal for Afghanistan: CNPC is paying 15 per cent royalty on oil, a 20 per cent rate of corporate tax and will give 50-70 per cent of its profits to the government, on top of building a new refinery. CNPC went into the deal with the Karzai family-linked Watan Group as local partner. All in all a very careful approach to investing in a risky country.

So the difficulties at the site and the staff harassment were a setback. In response, President Karzai’s Beijing visit in June included talks with CNPC, and also opened up discussions about developing a new pipeline to get CNPC’s gas out of Turkmenistan. CNPC is keen to develop another route to get gas out of South Yolatan, one of the world’s largest fields, possibly through northern Afghanistan and Tajikistan.

With the news that the field in Afghanistan is now producing, it looks like CNPC has cemented its position as a key investor in Afghanistan. The 25-year contract the company has signed has it extracting 1.5m barrels per year, and it is currently looking to extract 1,950 per day.

In contrast, the news from south east Afghanistan at Mes Aynak in Logar province is not nearly as positive. There, China Metallurgical Group Corporation (MCC) and Jiangxi Copper, the two Chinese state owned enterprises, were recently revealed to have withdrawn some of their operatives from the site. The reason given was security concerns with engineers reportedly spooked by a series of rocket attacks. Two weeks after these stories surfaced in the press, MCC president Shen Heting visited Kabul, meeting with Karzai and Minister of Mines Wahidullah Shahrani. In official read-outs from the meetings, security concerns were high on the agenda.

The picture may, however, be more complex than this. The Chinese companies have been accused of dragging their feet on the project, concerned about what is going to happen to the country after America officially withdraws in 2014. The important Buddist acheological remains at Mes Aynak are the subject of several campaigns, with researchers demanding more time to preserve the remains before mining commences. And the long-awaited rail line seems to be ever more distant.

Compensation for locals displaced by the site and the various ancillary projects alongside it has been slow to materialise. MCC also complained of Afghan partners being corrupt and inefficient, as documented in a US diplomatic cable revealed by Wikileaks.

All in all, it seems as though the Chinese companies were questioning their initial decision to invest. Looking back at the initial bids, it is clear that the Chinese bid high: offering a total investment $2.9bn (a figure that has been reported in fact as being as high as $4bn), $0.5bn more than the next offer. There were generous provisions for the Afghan government: a maximum royalty of 19.5 per cent and a bonus of $808m to the government as a signing bonus (the next closest was $243m).

MCC is concerned, along with others in the mining sector, about new legislation concerning mineral exploitation that is to be ratified by the Afghan government. Beyond Afghanistan, MCC has had other problems – its stock price in Shanghai has fallen from a high of over Rmb6 in 2009 to around Rmb2, and it recorded a net loss of $29m in the first half of 2012.

The contrast with CNPC’s experience in Amu Darya is stark. While CNPC is now producing from its site, the earliest possible production date now reported for Aynak is 2016. Clearly geography is something that has played in CNPC’s favor: northern Afghanistan is a relatively safe area compared to Logar province where Aynak lies.

The bigger question for China’s incoming leaders is how they are going to address Afghanistan once the US and Nato withdraw their primary responsibility for the country in 2014. China is not expected to take on a larger security role in the country: the PLA has little experience in such environments and such an aggressive approach is a world away from China’s non-interference policy.

China’s primary foreign policy tool is investment, mostly in Afghanistan’s natural resources: something it knows how to do very well from years of experience in frontier markets. However, this does not seem to be working in Afghanistan, with the government reportedly asking MCC to stay in Afghanistan. According to the Wikileak cable, Heting told American diplomats in October 2009 that ‘the Chinese government was urging the company to honour its commitments’.

The CNPC project may now be working, but the initial problems show that generous deals are no guarantee of a smooth passage. Beijing clearly has to re-think what it is going to do once 2014 passes. Afghanistan’s proximity to China and the potential knock-on implications in central Asia where China has invested a great deal make it is impossible to ignore.

China may not want to be dragged into Afghanistan’s interminable problems, but it seems impossible to imagine that they are not going to play some role. What this role ends up being is something that the new administration needs to calculate sooner than it wants.

Raffaello Pantucci is visiting scholar at Shanghai Academy of Social Sciences


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