Western energy firms are noted for venturing into volatile regions and areas that scare off more faint-hearted capitalists. But one country is even giving these hardened energy companies pause — Afghanistan. On September 22, Afghanistan issued a bid for tenders to exploit its vast mineral and hydrocarbon wealth, but found no important takers. Why is that?

As the U.S. government’s Bureau of Economic and Business Affairs’ February 2013 Investment Climate Statement — Afghanistan report dryly noted: “Security threats limit investors’ opportunities to develop businesses in some provinces, and certain sectors (such as mining and hydrocarbons) still lack a regulatory environment that fully supports investment. Domestic and foreign investors also rank endemic corruption high on the list of impediments.” The report then optimistically adds, “Despite these challenges, Afghanistan’s investment climate presents opportunities in all sectors of the economy.”

Insurgency aside, just how bad are things? The report notes that the 2012 Transparency International “TI Corruption Index” ranks Afghanistan “174/176 (Tied for last place with Somalia and North Korea.)”

The World Bank’s 2013 “Doing Business Report” ranks Afghanistan 168th out of 185 economies for the ease of doing business. Afghanistan’s rich mineral base has been known for a long time. Following the December 1979 Soviet invasion, extensive Soviet exploration in Afghanistan produced detailed geological maps and reports that listed more than 1,400 mineral outcroppings, along with about 70 commercially viable deposits.

The USSR subsequently committed more than $650 million for resource exploration and development in Afghanistan, which included a smelting complex for the Ainak deposit that was to have produced 1.5 million tons of copper per year. In the wake of the Soviet withdrawal a subsequent World Bank analysis projected that the Aynak copper production alone could eventually capture as much as 2 percent of the annual world market, while Afghanistan’s Hajigak iron deposit is assessed as one of the largest high-grade deposits in the world.

The 2010 joint report by the Pentagon, the U.S. Geological Survey and U.S. Agency for International Development states that Afghanistan possesses “previously unknown” and untapped mineral reserves worth up to $1 trillion. The foreign investor caution is not for a lack of effort on Kabul’s part, as the report noted, “The Government also issued tenders for oil and gas exploration in 2010″ before adding, “The nearby Afghan-Tajik Basin could hold as much as 1.5 billion barrels of crude oil.”

Chinese firms have scrambled to access its wealth but both of the country’s most important ventures are at a standstill. In Amu Darya, oil production has stopped because there is no deal in place to refine it and its Aynak copper deal is similarly stalled. Last year, oil extraction operations in the Amu Darya basin, estimated to hold over 80 million barrels of crude oil reserves, were contracted to China National Petroleum Corp. and Afghan Watan Oil and Gas energy company, but further work was halted after disagreements emerged over the specific conditions for transporting the oil out of Afghanistan.

The joint project, begun in December 2011, was Afghanistan’s first international oil production agreement for several decades and had been expected to earn the government billions of dollars over two decades of production.

Of course, the fact that in June 2012 the Amu Darya site was disrupted when Chinese engineers came under attack by men loyal to Afghanistan’s army chief of staff and part-time warlord Uzbek General Abdul Rashid Dostum probably didn’t help matters. But one rather surprising country has decided to take the plunge into Afghanistan’s volatile energy sector, unlike Beijing’s timorous mandarins and fainthearted Western investors.

After meeting with Afghanistan’s Minister of Mines Wahidullah Shahrani on 4 September, Azeri Minister of Industry and Energy Natig Aliyev told journalists that the two nations were preparing to sign an energy memorandum of understanding. The MOU, described by Aliyev as a road map or cooperation between the two countries’ ministries, is scheduled to be signed in November in Kabul. Aliyev said, “We discussed the issue of economic cooperation, especially in oil and gas spheres including ways of expanding Afghanistan’s resource base, conducting search exploration work and Azerbaijan’s assistance in the oil refining area.”

Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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