Our firm assisted a Western oil and gas company that participated in the tender, but lost to CNPC. We saw firsthand how the commercial terms that would govern the development of the oil as well as the procedures for selecting the winning bidder made it all but impossible for a Western company to win the tender against CNPC.
The terms offered by the Afghan government -- and designed, in large part, by the task force -- did not reflect realities on the ground in Afghanistan. The key term in any production-sharing contract is the profit split, which identifies what share of oil produced belongs to the government and what share belongs to the oil company. This split is based on a variety of factors, including the quality and quantity of the oil, the technical challenge of recovering the oil, the quality of local infrastructure, and the security and political risk of the region where the oil is located. Where there is less overall risk -- such as when there is plentiful, high-quality oil that is easy to access and move in a safe environment -- the government receives the lion's share of the profit oil. As risk increases, however, oil companies demand more profit oil to ensure an adequate rate of return on the capital invested.
In Central Asia, the norm is for the government to receive roughly one-third of the profit oil and for the oil company to receive the remainder. Yet in Afghanistan -- one of the riskiest countries in Central Asia, with incomplete geological data and the near absence of key infrastructure -- the task force pushed for a profit split that would give the Afghan government the majority of the profit oil. This was in addition to royalties and several other taxes included in the agreement, all of which are entirely atypical in Central Asia.
We provided the task force with several examples of contract terms in other Central Asian countries and repeatedly asked the task force to identify which countries served as the model for the unattractive commercial terms offered for the Amu Darya tender. The task force refused to answer our question, and the terms remained unchanged, resulting in virtually no interest in the tender among serious Western oil companies. The terms did not deter CNPC, however, which is willing to make investments in Central Asia that are not strictly profitable for the purpose of capturing resources and extending China's political influence.
The other problem was the process, under which the company that bid the highest royalty would be designated the winner of the tender so long as it met the basic technical requirements for executing the project. It was clear from the beginning that CNPC would bid the highest royalty (especially given that the terms were unattractive to Western companies). Indeed, according to industry experts we consulted, it is common knowledge that CNPC typically bids $5 to $7 per barrel more than other interested bidders in oil tenders in which it participates. So this selection process all but guaranteed that China would win the tender.
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