Afghan Gas Fields -- Agreement in Principle

UNCLAS SECTION 01 OF 03 KABUL 001982 SIPDIS STATE FOR SCA/A, SCA/FO (A/S BOUCHER, GASTRIGHT, DEUTSCH) STATE PASS USTDA FOR DSTEIN/SGREENIP STATE PASS OPIC, USAID OPIC FOR MOSBACHER/ZAHNISER/STEELE MANILA PLEASE PASS ADB/USED PARIS FOR OECD/ENERGY ATTACHE NSC FOR AHARRIMAN USAID FOR JKUNDER, MWARD TREASURY FOR ABAUKOL OSD FOR SHINN, SHIVERS CENTCOM FOR CFC-A, CG CJTF-76, POLAD, JICENT SENSITIVE SIPDIS E.O.12958: N/A TAGS: ENRG ECON EPET ETRD KPWR EAID PGOV AF SUBJECT: Afghan Gas Fields -- Agreement in Principle Ref: A) Kabul 1583/1206/1033/936/935/692/317/274/162 B) 06 Kabul 5353 and previous KABUL 00001982 001.2 OF 003 Sensitive but Unclassified. SUMMARY -------------- ¶1. (SBU) On June 11, the Afghan Minister of Mines convened a meeting attended by Embassy, USAID, and the Asian Development Bank (ADB),at which the ADB and the GoA agreed in principle to a USG proposal to combine USAID and ADB efforts to develop the natural gas reserves in the Amu Darya basin. The joint project will combine a $12 million ADB grant to the GoA with an existing $12 million USAID project to create a $24 million project for comprehensive development of the most promising fields in the Amu Darya basin. This approach will save ADB the $4 million in mobilization and supervision costs that would be incurred by a separate project. USAID is proposing to go ahead with its initial development of the first block of wells near a proposed power plant site at Sheberghan, and then expand the project to more wells once the ADB money comes online. Embassy believes this approach will save GOA and the donor community embarrassment for lack of progress on the ADB gas development project since it was first proposed in 2003. End summary. USG PROPOSAL -------------- ¶2. (SBU) In May 2007, the USG had proposed that USAID and ADB partner up and pool resources not just to rehabilitate selected existing wells but to foster further development of a large part of the Amu Darya gas basin. USAID's $12 million project will rehabilitate three gas wells, with the aim of fueling the proposed Sheberghan Power Plant that the USG is committed to building at the site. When the ADB's $12 million and USAID's $12 million are combined, there will be $24 million to cohesively develop the most promising fields in the Amu Darya basin. (NOTE: The ADB's total loan to the Ministry of Mines is $24 million. The Minister of Mines has recently made it clear that he wants the remaining $12 million of the $24 million ADB loan to fund rehabilitation of the Sheberghan to Mazar-i-Sharif pipeline.) This development work will pave the way for private sector participation through a production sharing arrangement at Sheberghan. At present, private players are reluctant to invest because they do not see a firm customer for gas on the horizon. By the time the USAID-ADB development of the gas fields is completed in 2008, USAID will be further along in its design and planning for the Sheberghan Power Plant, which will be seen by the private sector as an anchor customer. ¶3. (SBU) USAID is poised to begin work at Sheberghan. Through its contract with Black and Veatch International (BVI),USAID will seek a service provider to begin rehabilitating the initial block of seven wells, starting around October. A task order has already been prepared. To accelerate the project, ADB funds could be used under the USAID task order, which could be broadened to include development of several Amu Darya gas fields at Sheberghan. USAID aims to award its tender in September 2007, so it will need to have a firm commitment on pooling resources from ADB in place within the next two months. Our proposal has the blessing of the Minister of KABUL 00001982 002 OF 003 Mines and agreement in principle with ADB staff in Kabul, which has received an initial go-ahead from Manila. Project Scope -------------- ¶4. (U) The most promising potential for gas in the Amu Darya basin is in: two blocks within three existing fields (Jar Quduq, Khoja Gogerdaq, and Yatimtaq); two blocks with two exploratory fields that have had exploratory drilling but no production (Jangalikolon and Juma Bashikurd); and four wildcat blocks where there has been no drilling but experts believe the geologic formations are likely to contain gas reserves. The estimated gas reserves of the five existing and exploratory fields are 77.6 billion cubic meters, more than enough to supply a proposed 100 MW electric power plant for 20 years and meet the demand of future gas customers. ¶5. (SBU) If ADB does follow through on its agreement in principle to partner with USAID to launch a $24 million project, we envisage the following program components: a) $24 million will be allocated for testing, data and information gathering, and rehabilitation of wells in the three existing fields. Data and information from these activities will serve to ensure sufficient gas supplies for the proposed 100 MW electric power plant and will be used for engineering design of the plant. There are 112 wells in place in the three existing fields, but it is assumed that many of these wells are not usable. b) If still more funding becomes available in the future, completion of the first component would enable us to lay the groundwork for broader private-sector development of the resource with the following tasks: -- Conducting an international gas tender offer process for a Production Sharing Agreement (PSA) for the development and production of the three existing fields as well as an exploratory field. After the award of this initial PSA, a second gas tender offer would be conducted for Juma Bashikurd exploratory field and the remaining wildcat blocks. -- Engineering design of a gas processing and treatment plant to remove hydrogen sulfide and condensates from produced "sour" gas from all eight blocks. -- Develop a detailed gas market plan and feasibility study to optimize utilization of the Amu Darya basin gas reserves, including the viability of investments in long range gas treatment and gas transmission and distribution systems. Background on ADB Natural Gas Project -------------- ¶6. (SBU) The USG proposal came after a four-year ADB effort to find a way to rehabilitate selected gas fields at Sheberghan in the Amu Darya basin. The ADB and the Ministry of Mines (MOM) had been on the verge of cancelling an ADB loan that was approved in 2003. Each side blamed the other for failure first to find a service provider to rehabilitate 12 gas wells and a gas pipeline from Sheberghan to Mazar-i-Sharif, and after that was unsuccessful, for lack of KABUL 00001982 003 OF 003 progress in preparing the groundwork for a tender for a production sharing agreement. ¶7. (SBU) On May 17, Minister of Mines Ibrahim Adel had complained to the Ambassador about the ADB's inability to get the project off the ground. He said that President Karzai and his cabinet colleagues had taken him to task for not taking steps to develop the country's oil and gas reserves. Minister of Energy and Water Ismail Khan and others in the GOA had also complained to us about delays in Sheberghan development. ADB staff had expressed frustration at working with MOM. The subsequent USG proposal appears to have provided a positive way forward for both sides. WOOD