Thread by @JeffRigsby2

The more I read about the Sino-Afghan oil production agreement, the less I understand it:

reuters.com/business/afgha…

Haters will say that's because I don't know much about the oil industry. It's true!

But it only takes a little research to see the numbers don't add up.

Thread.

When this story came out, the first thing that seemed odd (once the investor was identified) was why China chose CAPEIC for the deal.

Because CAPEIC isn't an oil company, exactly. It's an "oilfield service provider": a contractor that provides technical support to oil companies.

Here's an explainer from KPMG about what oilfield service providers do:

home.kpmg/xx/en/home/ins…

One point to note is that these firms do a lot of work for national oil companies (NOCs): state-owned producers like Saudi Aramco.

The reason for this is pretty straightforward.

The Saudis have lots of cash, but they don't want the headache of employing thousands of technical specialists to pump their oil out of the ground. It's much simpler to pay contractors to do most of the work.

So it's strange that CAPEIC would be chosen for the Amu Darya project.

Unlike Saudi Arabia, Afghanistan doesn't have any money. The IEA can't just cut a check to CAPEIC to send in a team and start extracting oil.

The foreign partner in this case needs to bring capital as well as expertise. That's not usually how oilfield service providers operate.

Zabihullah Mujahid has said CAPEIC will invest a total of $540 million over the first three years of the contract. So do they have enough internal resources to do that?

It's not easy to be certain, since CAPEIC isn't a listed company and doesn't seem to publish its financials.

One of the few pieces of information on the company's website (in Chinese) is its headcount. CAPEIC has 287 employees:

capeic.com/cn/company/ind…

China National Petroleum, which signed a deal with the Republic to develop the Amu Darya reserves in 2011, has more than a million.

There's no published data on CAPEIC's revenue or assets.

So I looked for comparables at three of the world's largest oilfield services companies: Halliburton, Schlumberger, and Baker Hughes.

If anyone wants to check, their annual reports for 2021 are all easy to find online.

Revenue per employee ranges from $249,000 (Schlumberger) to $380,000 (Baker Hughes).

If CAPEIC's revenue per employee is as high as Baker Hughes', it would come in at about $109 million per year.

Assets per employee range from $279,000 (Baker Hughes) to $529,000 (Halliburton).

If CAPEIC's assets per employee are as high as Halliburton's, they'd come in at around $152 million.

The company is too small to finance the Amu Darya project with its current resources. And since it's not listed on the stock market, there's no easy way for it to raise equity.

It's possible, of course, that Beijing will arrange for CAPEIC to get the $540 million from state-owned policy lenders, like China Exim Bank or China Development Bank. That's how "Belt and Road" projects are normally financed.

But there's been no announcement to that effect.

With no visible commitment from anyone to provide capital, it's hard to see how this deal is a deal.

There's also another problem.

The CAPEIC deal includes a promise to build a domestic refinery, so that crude oil won't have to be exported to Central Asia for processing.

But technical expertise in refining isn't something an oilfield services company can provide. So CAPIEC would have to subcontract the work, probably to Sinopec or another Chinese company much larger than itself.

Do you have any idea how much it costs to build an oil refinery?

Me neither, at least until today.

But earlier this year, SpringerLink released an open-source textbook (𝘛𝘩𝘦 𝘗𝘢𝘭𝘨𝘳𝘢𝘷𝘦 𝘏𝘢𝘯𝘥𝘣𝘰𝘰𝘬 𝘰𝘧 𝘐𝘯𝘵𝘦𝘳𝘯𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘌𝘯𝘦𝘳𝘨𝘺 𝘌𝘤𝘰𝘯𝘰𝘮𝘪𝘤𝘴) with an entire chapter on that subject:

link.springer.com/chapter/10.100…

Here we go:

"It is generally estimated that a 160,000 b/d (8 million tons per year) refinery, equipped with catalytic cracking, visbreaking, and gasoline units and built in Europe, would currently cost more than $6 billion."

But maybe that's larger than what Afghanistan needs?

Actually, no. Mujahid said the Amu Darya fields are expected to reach production of 20,000 tons per day (7.3 million tons per year):

https://twitter.com/Zabehulah_M33/status/1610904389576806400

You could argue that these are cost estimates for Europe, and that building a refinery in Afghanistan will be cheaper.

But I doubt that.

Note that this is the cost for the refinery, which the project can do without. I haven't tried to estimate the capex needed to get the oil out of the ground, which CAPEIC has to do if it does anything at all.

So the project as announced is clearly impossible.

An investment of $540 million over three years won't cover more than a tenth of the cost of the refinery alone.

And since there's no evidence that CAPEIC has $540 million in any case, dropping the refinery from the plan won't solve the problem.

Some questions need to be asked.

It's understandable that the IEA might have overlooked such basic issues, since Afghanistan is desperately short of qualified technical personnel. They may have relied entirely on the Chinese to come up with these numbers.

But the Chinese themselves must know this won't work.

This project doesn't have the kind of official commitment from Beijing (in particular, a pledge of support from policy lenders) that would allow it to succeed.

But it does have official support of 𝘴𝘰𝘮𝘦 kind. The Chinese ambassador was at the press conference, after all.

Yet the surprising thing about this deal is that it happened at all. Everyone's been saying that China and the Taliban have irreconcilable differences on some issues, like the extradition of Uighur separatists.

That was supposedly why official Chinese investment wasn't coming.

Could it be that Beijing got the IEA to make a commitment that can be fulfilled in the short term, in exchange for a pledge of economic cooperation that won't happen?

I have no idea. And my friends who claim to have good Taliban contacts say the Uighurs will never be returned.

At any rate: if the Taliban did make promises to China in return for this project, I wouldn't advise keeping them yet.

There are questions about the agreement that any rando could have brought up (hi!) and until Beijing answers them, it's safe to assume there is no deal.

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