Under the contract, China National Petroleum Corp, one of the largest energy companies in the country, will give up to 70 percent of its profits from the project to the Afghan government. [Provided to China Daily]

Approval marks second large deal between two countries since 2008

KABUL - Afghanistan's cabinet has cleared the way for the war-torn state to sign a deal with China National Petroleum Corp (CNPC) for the development of oil blocks in the Amu Darya basin, the Afghan president's office said on Monday.

The deal concerns drilling and a refinery in the northern provinces of Sar-e Pul and Faryab. It will be the first agreement pertaining to international oil production that the Afghan government has signed in several decades.

It also marks the second large deal China has brokered in Afghanistan after the Metallurgical Corp of China signed a contract in 2008 to develop the huge Aynak copper mine south of Kabul, where production is to start by the end of 2014.

"The Afghan cabinet has ordered Mines Minister Wahidullah Shahrani to sign an oil exploration contract for Amu Darya with China National Petroleum Corporation," the statement said.

Jawad Omar, a spokesman for the mines ministry, said the contract will be signed on Wednesday.

The State-owned CNPC and the joint-venture partner Watan Group - a diversified Afghan company - will look for oil in three fields in the basin: Kashkari, Bazarkhami and Zamarudsay, which are estimated to hold about 87 million barrels of oil.

Under the contract, CNPC will agree to pay a 15 percent royalty for oil, a 20 percent corporate tax and give up to 70 percent of its profits from the project to the Afghan government.

The mines ministry said in October that the deal was likely to bring the government $5 billion in revenue during the next 10 years.

Indian and Chinese bidders have been front-runners in the competition for deals to develop Afghanistan's vast mineral deposits, which are valued at $3 trillion, worrying Western companies that have hesitated to invest in the country as a result of concerns about security.

Experts have warned that mining projects in Afghanistan are likely to be targets for insurgents, that production and transport costs there will be high and that sovereign risk is a serious concern.

But China and India, where the demand for energy and industrial supplies is booming, are willing to take risks to secure what they need.

Reuters