China is First in Afghanistan Oil Extraction

China is taking its drilling efforts to the Middle East.

On Sunday, drilling began in the provinces of Sar-e-Pul and Faryab in Afghanistan, following up on a contract signed between the nation and China's National Petroleum Corp. (CNPC) last December.

This announcement rides on the heels of Friday's announcement that the Canadian government rejected China's Petroliam Nasional Bhd.'s bid on Progress Energy Resources Corp. (TSX: PRQ), an offer worth C$5.2 billion.

The government determined that the proposed takeover bid was not sufficiently beneficial to Canada. Analysts have called this a “test case” for Chinese Cnooc Ltd.'s (HKG: 0883) $15.1 billion bid on Canada's Nexen Inc. (TSX: NXY).

From BusinessWeek:

“It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises,” said Jack Mintz, director of the University of Calgary's School of Public Policy. Canada's foreign-investment rules remain vague and “the government needs to send a clear signal on what's on and what's off in terms of foreign investment.”

But it looks like China's betting that this is “off.” Its move into Afghan oil reserves might provide a backup if even more Canadian bids – like the bid on Nexen – fall through.

The 25-year contract will begin major oil production in Afghanistan for the first time. Mining minister Wahidullah Shahrani told Reuters that extraction should be 1,950 barrels per day – 1.5 million barrels annually.

The Amu Darya basin is estimated to contain 87 million barrels of crude oil. In its extraction, CNPC will pay a 15% royalty and a 20% corporate tax, and between 50 and 70 percent of the profits will go to the government.

And oil extraction will prove crucial to the Afghanistan economy in the next few years, Zero Hedge reports, as aid dries up and foreign troops prepare to leave by the end of 2014.

The nation plans to profit from sales of the refined oil to clients within the nation or through exports, a process that will be possible within two to three years when CNPC completes construction of its Turkmenistan refinery.

Unemployment in Sar-e-Pul is 18%, more than double the national average. But the drilling project, which has already created 2,100 jobs in the region, could be a big benefit to the entire nation.

As China begins to snap up resources abroad, Western companies may lose out, citing “security concerns” as reasons for not moving into these resources.

China, meanwhile, may not be striking success in Canada. But in Afghanistan, it's already controlling the oil business.

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