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UNCLAS SECTION 01 OF 04 KABUL 002827 DEPT FOR SCA/RA, SCA/A, EEB, EEB/ESC/IEC (GRIFFIN) DEPT PASS AID/MARK WARD, AID/ANE, OPIC DEPT PASS USTR FOR LILIENFELD AND KLEIN DEPT PASS OPIC FOR ZAHNISER DEPT PASS TDA FOR STEIN AND GREENIP CENTCOM FOR CG CFC-A, CG CJTF-76, POLAD, JICENT NSC FOR JWOOD TREASURY FOR ABAUKOL, BDAHL, JCASAL, AND MNUGENT MANILA PLEASE PASS ADB/USED PARIS FOR USOECD/ENERGY ATTACHE OSD FOR SHIVERS, SHINN COMMERCE FOR DEES, HAMROCK, AND FONOVICH SIPDIS E.O. 12958 N/A TAGS: ENRG, EFIN, ETRD, KPWR, EAID, EINV, PGOV, AF, SUBJECT: MINERALS ABOUND IN AFGHANISTAN, AN UPDATE ON THE SECTOR 1. (SBU) Summary. A viable engine of economic growth, the mineral sector in Afghanistan is striving for advancement step by step. At times, Afghanistan's steps are firm, promoting modernization, other times they are wobbly or haphazard, resulting in retraction. In recent months, Afghanistan received its first major mineral-derived payment, and the World Bank reaffirmed its commitment and goal of transforming Afghanistan into the mineral equivalent of Argentina in South Asia. A first step in this transformation, the implementation of a mining cadastre is underway. Progress in transparency and accountability is being pushed, and large tenders in the iron-ore, oil and gas sectors beckon. Nevertheless, the lack of cohesion and delays in the revision and passage of laws and regulations governing the hydrocarbon and gemstone sectors frustrate and retard the supreme goals of creating employment and increasing government revenues. A proposed "road show" by the Ministry of Mines will no doubt showcase the exasperating yet alluring dichotomy that is Afghanistan's mineral sector. End Summary. AYNAK COPPER PROJECT - RECENT NEWS ---------------------------------- 2. (SBU) The winning contractor, China Metallurgical Group Corp. (MCC), a Chinese state-owned company, has made its first payment in the amount of USD 81 million to the Government of the Islamic Republic of Afghanistan (GIRoA). This payment represents 10% of the total USD 810 million the company will pay the GIRoA in order to develop the world-class mine deposit. An additional 20% is due upon the completion of a feasibility study (approximately 12-18 months from now), and the final 70% is due when MCC begins copper ore extraction (approximately 5 to 6 years). 3. (SBU) According to sources at the Ministry of Mines (MOM), the Ministry of Interior has begun recruiting up to 1500 security personnel to de-mine, clear, and guard the Aynak Copper Project site. Furthermore, the World Bank's Project Management Unit (PMU) embedded within the MOM has indicated that templates for Memoranda of Agreement (MoA) for Water and Security are being drawn up by the tendering transaction advisor, Gustavson and Associates of Boulder, CO. MoA's regarding construction of a 700 km railroad and an 800 MW (formerly 400 MW) coal-fired power plant have yet to be addressed. According to Minister of Economy Shams, a group from MCC will brief the Inter-ministerial Committee on Energy (ICE) during its November meeting. MINISTRY OF MINES CADASTRE PROGRAM - TRANSPARENCY COMING ---------------------------------- 4. (U) In modern mining, the term cadastre refers to a comprehensive computerized geo-scientific database that registers land titles, includes advanced geographic information, administrative boundaries, and integrates environmentally sensitive areas which can be fully visualized, queried and printed in the form of maps. The establishment of a Mining Cadastre aims to improve governance in the mining sector, ensuring that proper surface rents, fees, and royalties are administered and collected as well introducing a transparent system to grant, manage and cancel permits. 5. (SBU) The efficient and reliable management of mining titles forms the basis of any effort to increase private investment and growth in the mining sector. It will address the current lack of transparency at MOM, which could impede future private investment. The Mining Cadastre is part of the World Bank's International Development Association (IDA) $30 million grant program that funds the PMU, and will be executed by GAF AG of Germany. GAF AG has completed similar Mining Cadastre projects in many other developing countries with significant mineral potential, some of which have subsequently and successfully attracted substantial foreign direct investment in their mining industries. Typical project timelines are 24-36 months, with the latter portion concentrating on training and capacity building within the host country's regulatory ministry. WORLD BANK REAFFIRMS COMMITMENT TO MOM AND AFGHANISTAN ------------------------------- 6. (SBU) In a recent meeting with the World Bank's Senior Regional Oil, Gas, & Mining Specialist, ECON OFF learned of the ongoing commitment of the World Bank to development of Afghanistan's natural resource sector. A second World Bank IDA package is being drawn up now and will continue initiatives begun in creating a modern legal and regulatory framework, improving sector governance and transparency, adoption of an internationally competitive fiscal and mining taxation package, capacity building, and improvement of Afghan geo-science. 7. (SBU) The new IDA package will also introduce schemes primarily aimed at environmental, social, and contractual monitoring of the mineral sector. Besides helping to fund an environmental and social group within the MOM and the National Environmental Protection Authority, the second IDA package will also require Afghanistan to join the Extractive Industries Transparency Initiative (EITI), a coalition of governments, companies, civil society groups, and investors that aim at improving transparency and accountability in this sector. Its main pillar is verification and full publication of company payments and government revenues from oil, gas, and mining. GEMSTONES - MOM LACKS COHERENT POLICY TO ADVANCE INDUSTRY ------------------------------ 8. (U) Gemstone mining began in Afghanistan 7000 years ago. The British Crown Jewels, Royal Crown Jewels in Russia and the Taj Mahal all contain examples of Afghan emeralds, rubies, and sapphires. The rubies and emeralds mined in Afghanistan are among the highest quality in the world, and the lack of a cohesive, fair and executable gemstone mining policy represents a significant lost opportunity in nationwide revenue collection. 9. (SBU) The "13th Century" mining techniques currently employed in Afghanistan use very antiquated tools and equipment with little or no health, safety, or environmental considerations. Currently, the Afghan gem industry operates in a legal and regulatory vacuum. Although a Minerals Law was enacted in 2005, the lack of capacity and understanding among both government officials and mine operators contributes to an ineffectual and inconsistent application of legal terms. Fiscal arrangements with respect to actual license and authorization amounts as well as ranges for royalty amounts are not addressed, leaving room for back-room and hand-shake deals. Furthermore, the lack of processing operations in Afghanistan and the unpredictable and excessive fees and royalty schemes (from 24 to 40%) presently implemented result in 95% of gemstone production being transported raw to Pakistan and sold at drastically below market prices. Thus, little or no social infrastructure, employment, or revenues are derived from gemstones. 10. (SBU) ECON OFF has met with a variety of actors who aim to improve the "playing field" for the gemstone industry. The World Bank's PMU embedded within the MOM is trying to formulate specific regulations and/or ministerial policies that would clarify the Minerals Law as directed towards small and mid-size gemstone mining. In addition, individuals within the NGO sector have established a gem cutting, polishing and jewelry setting program that aims at building capacity and laying the foundation for value-added operations in Afghanistan. Post will continue to engage with a variety of actors, including those interested in export promotion and investment, such as the Export Promotion Agency of Afghanistan (EPAA) and the Afghanistan Investment Support Agency (AISA), with the goal of incremental regulatory and commercial advancement simultaneously. HYDROCARBON LAW STILL IN DEVELOPMENT ------------------------------------ 11. (SBU) According to the World Bank PMU Mining Advisor, the yet to be finalized Hydrocarbon Law is a source of contention between the MOM hierarchy and external advisors. The World Bank's PMU Oil and Gas Advisors contract will not be renewed. Apparently revisions the PMU advisor proposed to the law were not popular with Minister Adel and personalities clashed. Rather than exacerbate tensions, the World Bank has allowed the Norwegian Agency for Development Cooperation (NORAD) advisors assigned to the MOM to take the lead in reviewing and revising the law. Their suggestions/modifications are currently being considered by the lower house of parliament and have stalled Minister Adel's plan to ram the law through the approval process. 12. (SBU) The World Bank and others maintain that the law should be modeled on other hydrocarbon laws passed in the Middle East that take into account Islamic/Sharia law, in which surface rights belong to land owners, while underground rights belong to the state. Furthermore, the revisions aim to address vague language, and the ability for landowners to become party to a contract for hydrocarbon operations without going through the formal tendering process. The latter loophole is tailor made for payoffs and other substantial graft. HAJI-GAK IRON ORE PROJECT - EVEN BIGGER THAN AYNAK ------------------------- 13. (SBU) Our World Bank PMU source indicates Gustavson and Associates of Boulder, CO has been retained to develop and issue tender documents for this project. World Bank PMU was initially reluctant to retain Gustavson for tendering, instead preferring an open bid process. However, Minister of Mines Adel strongly pushed for their hiring based on their experience/knowledge of Afghanistan and the positive results obtained from previous tendering with Aynak. World Bank PMU eventually acquiesced and reports tendering documents will be released by the end of this year. Among the companies rumored to be interested are Anglo-Australian producers BHP Billiton and Rio Tinto, the Brazilian company Vale, and Chinese MCC (winner of Aynak Copper Tender). Post is not aware of any interest to date by American firms. MINISTRY OF MINES ROAD SHOW - PROMOTE NORTHERN PROSPECTS --------------------------- 14. (SBU) Minister Adel plans to embark on an Afghanistan Hydrocarbon "road show" in the coming months (probably in January) to promote the country's untapped potential in the natural gas and oil sectors. The proposed road show is being organized by NORAD and would include stops in London, Singapore, Dubai, Oslo, Calgary, and Houston. Up for discussion are three oil and gas blocks in northern Afghanistan (Kashkari, Jangalikolon and Juma-Bashikurd), adjacent to a USAID-funded gas field exploration and testing project (Sheberghan), across from the Turkmenistan border. The oil and gas blocks lie within the same basin that straddles both countries and which produce capably on the Turkmenistan side of the border. For this reason, the Minister is confident these blocks will be successful and will draw interest from international companies. WOOD