China-Afghanistan Oil Deal Signed as Tensions Mount in Middle Eas

China wrote history this week after gaining approval for oil exploration in the Amu Darya Basin in Afghanistan, making it the first international oil deal made by Afghanistan with a foreign country in several decades.

Wahidullah Shahrani, the Afghan mining minister in a statement during the signing ceremony:

"Today is a historic day in Afghan history. This is the first time that Afghanistan signs a great contract for the country's oil exploration."

China National Petroleum Corporation (CNPC) will manage the exploration with its Afghan joint venture partner Watan Group in the northern provinces of Sar-e Pul and Faryab by drilling in three oil fields: Kashkari, Bazarkhami and Zamarudsay.

Afghanistan's oil reserves are estimated to total 1.6 billion barrels. Afghanistan has been entirely reliant on fuel imports from neighboring Iran and Central Asian Nations, and is now more than open to foreign investors helping develop oil-extraction and refining capabilities.

The oil fields in the Amu Darya Basin alone are estimated to harbor around 87 million barrels of oil, which can generate government revenues up to 5 billion dollars within 10 years. The oil deal is set for a 25 year term.

But experts report that the CNPC will have to spend considerable time, probably five to ten years, before they can actually find the oil and begin extracting it for market.

The demand for energy in China is booming, with its energy consumption per GDP more than double the world's average, thus making China more assertive to take risks. Mining projects in Afghanistan will likely be targeted by insurgents, but local government officials promise the army will set up special units to guard the project.

China already signed a major deal with Afghanistan in 2008 when Metallurgical Corp of China started the development of huge Aynak copper mine south of Kabul, which will start production in 2014.

Western countries have held back from investing in Afghanistan, which has been in war over the past ten years. China has taken the forefront in the exploration of what some say could amount to 3 trillion dollars' worth of natural resources, including untapped copper, iron and oil deposits.

The deal comes amid mounting political tension in the region. Iran, the world's 4th largest crude exporter, this week threatened to stop ships moving through the world's most important oil route if the US insists on pushing sanctions over its disputed nuclear program.

According to the U.S. Department of Energy, the Strait of Hormuz at the mouth of the Persian Gulf is considered the world's most important oil chokepoint, connecting the biggest Gulf oil producers, including Saudi Arabia, with the Gulf of Oman and the Arabian Sea. A sixth of the world's oil flows through the passageway.

China's booming demand for energy has driven global oil demand growth for a decade, but has been increasingly reliant on shipments from the Middle East.

The United States has signed a $29.4 billion deal to sell fighter jets to Saudi Arabia, which is Iran's rival for the market in the Middle East. The US claims the move will boost Gulf security amid rising tensions with Iran.

China, who has strong commercial and trade agreements with Iran, on Thursday urged for peace and stability to be maintained in the strait, but didn't state whether it had any contact with Iran about the conflict.

(shanghaiist.com, Edited by Topco)