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1 POLITICAL BACKGROUND
There have been recent reports in the media that large mineral and hydrocarbon deposits have been located in Afghanistan. The basis for these reports is a new survey done by the United States Geological Survey (USGS). This has lead to a spike in interest by global mining and energy companies in Afghanistan as a potential place to explore. There has also been discussion in the international legal community on the legal and regulatory framework of hydrocarbon exploration in the country.
The petroleum sector in Afghanistan has been stagnating for decades. There has been none to little progress in the sector since the Soviet Union withdrew its troops from the country in 1989. Prior to Taliban rule, there had been exploration activity predominantly in the north-eastern Jowzjan province and into the Amu Darya basin. In fact, several discoveries had been made and certain of these discoveries were also exploited during the same period. While discoveries included both oil and gas, mostly gas was found.
2 LEGAL BACKGROUND
Following the fall of the Taliban in 2001, the Afghan Ministry of Mines (MOM) retained a number of international consultants. On such advice, despite being occupied and continuing to be at war with resistance elements, Afghanistan's cabinet passed a temporary hydrocarbon law in 2005. Frequent criticisms of this law included:
- Unclear concepts: contracts vs concessions;
- Lack of process transparency; and
- Unclear language and English translation.
In 2007 the Norwegian Agency for Development Cooperation (NORAD) was instructed by MOM to assist in launching an international hydrocarbon bidding round. NORAD accepted the instructions on the condition that the country's hydrocarbon legislation be significantly improved.
3 THE BIRTH OF THE NEW HYDROCARBON LAW
At a conceptual level, NORAD recommended clarifications to the hydrocarbons law of 2005, particularly to the distinction between contracts and license systems. Amendment were proposed whereby a contractual system was introduced for exploration and production (as well as for pipeline operations and geological/ geophysical services) and where such contracts were to be "perfected" by way of licenses. In addition, amendments were proposed to differentiate between obligations pertaining to various contractors.
On the issue of improving transparency, NORAD recommended, inter alia, hydrocarbon contracts only be awarded through public tender. This was not provided for in the 2005 temporary hydrocarbon law.
Another area of amendment pertained to investment security and stability as well as amendments intended to promote efficient governance of the petroleum sector such as clarifications of the powers of various authorities. Drafting amendments were also proposed.
MOM completed its work on the draft new hydrocarbon law in 2007. During the parliamentary proceedings, the draft law proposed by MOM was further amended to account for comments, consultations and discussions amongst members (and factions) of the Afghan ruling coalition.
Following due process in parliament, the draft law was approved by the Parliamentary Lower House (Wolesi Jirga) in June 2008 and by the Upper House (Meshrano Jirga) in December 2008. It was then sanctioned by President Hamid Karzai on 24 January 2009 and the Law entered into force on 1 February 2009 when it was gazetted in the Official Gazette.
The final text of the new hydrocarbon law is considered to have incorporated modern and international petroleum law standards.
4 THE HYDROCARBON LAW 2009
The Hydrocarbon Law of 2009 replaced the Hydrocarbon Law of 2005 with significant improvements. The Law is supported by the Hydrocarbon Regulations of 2009.
The 2009 Law regulates a wide array of issues including the establishment of a public hydrocarbon register and hydrocarbon databank, tenders, qualification and eligibility, contractors' obligations including provisions related to employment and training of Afghan nationals, procurement of domestic goods and services, health, safety and environment. The Law also contains provisions aimed at combating corruption and resolving disputes.
Under the Hydrocarbon Law of 2009, as a fundamental principle, all hydrocarbons located on or under the ground in the Islamic Republic of Afghanistan is the exclusive property of the federal state. Under the procedural provisions of the Law of 2009, a tenderer may bid (as part of a public tender) for the right to conduct exploration in Afghanistan. A successful tenderer may, under the law, then gain title to a contractually specified share of produced hydrocarbons.
The Hydrocarbons Regulations assist in implementing the Hydrocarbon Law 2009. The Regulations were adopted by Cabinet in October 2009.
Notably, the Regulations of 2009 include a provision on payment procedures, thus making the sector more transparent. Further, the Regulations include a chapter on hydrocarbon procurement rules. These rules tie in with Afghanistan's Procurement Law but cater to modern international procurement principles and sectoral international best practices.
5 MODEL EXPLORATION AND PRODUCTION SHARING CONTRACT
For purposes of the first round of bidding in Afghanistan's modern era, it was determined to offer an Exploration Production Sharing Contract (EPSC). Naturally, the model EPSC was drafted to be in line with the Law and Regulations of 2009.
The main goal of the first model EPSC however was an adequate production sharing mechanism for the first round. It was perceived as necessary that the terms of the ESPC be both attractive and competitive all the while balancing Afghanistan's national interest. The production sharing mechanism in the model EPSC was thus based on a model capturing resource rent for the state of Afghanistan.
6 AFGHAN'S FIRST HYDROCARBON BIDDING ROUND
The First Afghan Hydrocarbon Bidding Round was launched in March 2009 with a final bid deadline of 15 November 2009. The round included one oil and two gas blocks, with over 2,000 km2 of exploration acreage. Illustrating transparency, information relating to the First Round was and remains publicly available at www.afghanistanpetroleum.com. The First Round attracted considerable initial interest, with eight companies pre-qualifying, though only one formal bid was eventually received. This bid was however held not to conform to bidding conditions and was therefore rejected outright.
7 FUTURE BIDDING ROUNDS
MOM is pursuing plans for further rounds for both oil and gas exploration. As part of these plans, work is under way to update both the Hydrocarbon Law of 2009 and the commercial terms of reference on which the First Round was based.
8 CONCLUSION
While Afghanistan may have potential resources underneath its surface, there are a number of obstacles which remain in the path of exploitation of such wealth. The country remains occupied and battles with insurgents continue. Adding to concerns of violence is the long term threat of the return of Taliban rule after occupation. In addition to political concerns, strong reservations remain with investors on issues of transparency and corruption. Weak national infrastructure is another detractor. These issues include transport, energy, water and waste disposal infrastructure deficiencies. In summary, while Afghanistan has made progress at a legal level on developing its E&P sector, much work remains. Nonetheless it remains to be seen how companies will respond to future rounds.
The author is an Associate with SNR Denton & Co., Doha, Qatar, and holds a Bachelors degree from McGill University and an LLB Dalhousie University (Canada). Comments may be directed to editors@counselpakistan.com.
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