China’s $540 million energy deal with the Taliban in Afghanistan: What does it mean?

The Taliban celebrated the signing of their first international deal since taking power in August 2021 with a televised event on 5 January 2023. The document that was signed is a deal with a Chinese business to exploit oil reserves in the north of Afghanistan.

According to the agreement, Xinjiang Central Asia Petroleum and Gas Co. (CAPEIC) will give $150 million each year to Afghanistan. In three years, this amount will rise to $540 million for the 25-year contract. The initiative is focused on a 4,500-square-kilometre region that spans three northern Afghan provinces: Sar-e Pol, Jowzjan, and Faryab. The latter two are Turkmenistan's borders.

The aid-based economy of the country collapsed after US troops left Afghanistan in August 2021 and the Taliban overthrew the US-backed government. The administration is attempting to stabilise the economy by luring in investments that will provide work for Afghans who are suffering from hardship. 

The development of mines and hydrocarbon resources is one of the few viable choices available to the Taliban to prop up the economy. Besides, China can be a great potential economic partner. Hence, the deal was an obvious decision.

Previously, the state-owned China National Petroleum Corporation (CNPC) and the previous administration signed such an agreement back in December 2011. The Amu Darya basin was thought to contain up to 87 million barrels of crude oil at the time. Wahidullah Shahrani, the mining minister at the time, stated that "real work will begin in October 2012." He mentioned negotiations with an undisclosed northern neighbour and the anticipation that Afghanistan may be producing 25,000 barrels per day by the end of 2013 when he stated in March 2013 that "the wells are ready for production."

As Kabul talked with Uzbekistan about transit issues, construction seemed to have stopped, and by August 2013, Chinese workers had left the country. Hence, the recent development holds a great deal of significance.

Having to deal with the Taliban is part of a bigger strategic problem that China is having with its energy security. China has the most people and is an industrial powerhouse. It also uses the most energy in the world. The country does not have enough resources to meet the needs of its rapidly growing domestic market. As a result, China is now a sizable net importer of oil and gas, which has been a driving force behind several of its recent alliances, including those with Russia, Ecuador, and the Gulf States of the Middle East.

Although China has maintained excellent relations with these nations, Beijing's energy imports have a strategic weakness since, with the exception of those from Russia, they must be transported by sea and via politically sensitive areas that the US is militarising, including the South China Sea. 

Since China has the BRI and other projects like this to create its own sphere of influence, but no Chinese strategic blueprint, including the BRI, would be complete without including Afghanistan. The Middle East, Central Asia, and Southern Asia are all connected via a little section of border that the Central Asian nation shares with China.

This shows that Kabul is important to China's security and strategy, as well as to the growth of its economy. Even though Afghanistan has always been unpredictable and, therefore, not a good place for politics, the end of the US-led war against it and the takeover by the Taliban have given China a chance to expand its sphere of influence in the area. But due to the Ukraine war, the country's economy suffered. 

Also, with its vision to become an economic superpower, China needs Afghanistan on the right side of the line. Besides, the war also disrupted its energy supply chain. Against the backdrop of all these, the investment has taken place. 

Creating a Viable Economy for Afghanistan

At a ceremony in Kabul to sign a contract for a new field, Mullah Abdul Ghani Baradar, the Taliban's vice prime minister for economic affairs, said that his group wanted to make Afghanistan's economy work. It will channel newer windows of cooperation between the two.

Paving the way to create new investment opportunities

Ten years ago, American experts estimated that Afghanistan's natural resources—which include rare-earth minerals now used in electric cars—were worth $1 trillion. This potential wealth was never taken advantage of while the war raged. Besides, developing mining and oil ventures in Afghanistan is still the safest it's been in years in comparison with the previous time.

This project shows how China and Afghanistan can work together on big projects in the energy industry and other fields. The Taliban's minister for minerals and oil, Shahabuddin Dilawar, also asked China to finish developing the huge Mes Aynak copper mine, which is one of the world's largest untapped copper resources.

New Job Opportunities for Afghans

Shahabuddin Dilawar, the Taliban's minister for minerals and petroleum, claimed that the Amu Darya project would give Afghans 3,000 new jobs. He claimed that the Afghan side initially owned 20% of the project. In two to three years, he would make sure that the economy would flourish and that there would be people coming from overseas to work in Afghanistan. Dilawar stated that the field's oil would be refined in Afghanistan, though it is unknown if China would be willing to set up a refinery there.

Attracting New Foreign Investments

Afghanistan has 1.75 trillion cubic feet of confirmed natural gas reserves and some oil in addition to its tremendous mineral wealth. The Chinese investment shows that the political and economic situation is getting better right now. It will attract newer foreign investments in related fields. 

Besides, China agrees to follow its long-standing policy of non-interference and to respect Afghanistan's internal politics in exchange for this agreement. At the same time, it provides the United States with a significant edge and different options. Other investors may get some insights from this.

Promoting Economic Growth and Stability in the Region

With this investment in Afghanistan, China has played a significant role in a number of areas, including energy and minerals. The government has recently spent a lot of money on Afghanistan's infrastructure and developing its natural resources, which has helped the economy grow and keep peace in the area.

Growing mineral industry

In addition to the energy industry, China has also become a major player in Afghanistan's mineral industry. China has been involved in the exploration and mining of these resources. The nation is thought to have enormous quantities of minerals, including iron, copper, gold, and lithium.

For instance, the China Metallurgical Group Corporation (MCC) helped to develop Mes Aynak in Afghanistan, one of the largest copper mines in the world. The mine is expected to give thousands of people jobs and strengthen Afghanistan's economy.

Another Milestone for the BRI

The Belt and Road Initiative (BRI) is a global plan to improve infrastructure that aims to connect countries in Asia, Europe, and Africa through a network of roads, trains, and ports. China is involved in Afghanistan's energy and mineral industries as part of this plan. Afghanistan is seen as an important part of the BRI and a way for China to grow its global economic and political influence further.

Energy assurance for China

China has benefited from the expansion of Afghanistan's oil and mineral industries in addition to the country itself. China is able to ensure a consistent stream of energy and minerals for its own use by investing in Afghanistan's natural resources, assisting in the country's long-term economic progress. Additionally, China's investments in Afghanistan's infrastructure and resources have improved trade and transit connections between the two nations, further solidifying their economic ties.

Exploration of new gas fields

However, the estimated oil reserves at the Amu Darya site are not that significant. However, there is hope that a massive gas field that is just across the border from Turkmenistan extends into Afghanistan; if this is the case, it could make Afghanistan's economy as important as it is for Turkmenistan.

Facing the odds: real challenges to be addressed

China's influence in the region will be met with diplomatic and strategic moves by the United States and other actors in the region. Besides, the country is surrounded by so many challenging terrains that it will be a massive task for China to transport the resources to their destination.

Local politics should also be taken into account since local warlords are heavily armed and can create huge obstacles in many areas. But in the end, this is a sign of new competition in the region in terms of economic prospects, and the Taliban regime may find a new economic instrument to strengthen its grip on power.

Syed Raiyan Amir is a Research Associate at the Center for Bangladesh and Global Affairs.