technical assistance consultant’s report · appendix 2 gas sector assessment appendix 3 pipeline...

Technical Assistance Consultant’s Report

Project Number: 37085 December 2007

Islamic Republic of Afghanistan: Preparing the Natural Gas Development Project

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and e Government cannot be held liable for its contents. (For project preparatory technical

assistance: All the views expressed herein may not be incorporated into the proposed project’s design.)

Prepared by

Gustavson Associates

Colorado, U.S.A.

For the Ministry of Mines

ADB and th

TA 4666-AFG

Natural Gas Development Project Revised Final Report

for the

Asian Development Bank

and Ministry of Mines Islamic Republic of Afghanistan

31 December 2007

12/31/2007 Gustavson Associates

REVISED FINAL REPORT

TA4666-AFG Natural Gas Development Project


EXECUTIVE SUMMARY This is a revision of the Final Report, which includes updates based on comments from the Ministry of Mines, dated Dec. 27, 2007. There are substantial proved reserves of natural gas near the town of Sheberghan in northern Afghanistan. Gas has been produced since the 1960s, but the current production rate is only about 5% of the highest historical level. The country imports almost of its energy needs, so development of the natural gas reserves would be beneficial. Development requires simultaneous efforts in upstream field development and downstream market creation. The Government of Afghanistan proposes to invite the private sector to undertake upstream development of the fields. The private sector will only be interested if there is a prospect of selling gas to reliable consumers, at a profitable price. There are three candidate initial markets: the existing Khud Berg fertilizer plant, residential and commercial consumers in Sheberghan, and a proposed 100 MW gas fired power plant. This PPTA recommends construction of a new gas distribution network for the town of Sheberghan, since the current network is in poor condition. It recommends that Afghan Gas be the Implementing Agency for construction and operation of the new network. The PPTA also recommends capacity building for Afghan Gas to enable it to accomplish these tasks in an economically sustainable manner. Furthermore, the PPTA recommends capacity building at the Ministry of Mines in the form of a group for natural gas environmental, health and safety issues, and another group for monitoring prices of natural gas transactions. Price regulation is not recommended at this time, due to (i) a lack of price regulation expertise within the country, and (ii) the relative simplicity associated with price setting between buyers and sellers without government intervention. The estimated total cost of the PPTA recommendations is small, only $25.9 million. It seems appropriate to fund a small project initially, as a “pilot project” to demonstrate the feasibility of successful business activity in the Afghan natural gas sector. Success will surely lead to subsequent projects, due to the great need for energy in Afghanistan.


CURRENCY EQUIVALENTS

Currency Unit - Afghani (Af)

Af 1 = $0.02 $1.00 = Af 50

ABBREVIATIONS

ADB Asian Development Bank EA Executing Agency EHS Environment, Health and Safety EIRR Economic Internal Rate of Return EMP Environmental Management Plan FIRR Financial Internal Rate of Return GA Gustavson Associates H2S Hydrogen Sulfide IEE Initial Environmental Examination MM Ministry of Mines NORAD Norwegian Agency for Development Cooperation PMU Project Management Unit RRP Report and Recommendation of the President TA Technical Assistance TAPI Turkmenistan-Afghanistan-Pakistan-India pipeline USAID United States Agency for International Development WACC Weighted Average Cost of Capital

WEIGHTS AND MEASURES

BCF billion cubic feet D day m3 cubic meter MCF thousand cubic feet MMCF million cubic feet MCFD thousand cubic feet per day MMCFD million cubic feet per day MW megawatt ppm parts per million TCF trillion cubic feet


CONTENTS

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Policy Briefing on the Natural Gas Sector 5 C. Analysis of Key Problems and Opportunities 6

III. THE PROPOSED PROJECT 9 A. Outputs 9 B. Impact and Outcome 10 C. Technical Justification and Selection Criteria 12 D. Project Preparation, Implementation and Monitoring Capabilities 12 E. Special Features 12 F. Cost Estimates 13 G. Financing Plan 14 H. Implementation Arrangements 14

IV. PROJECT BENEFITS, IMPACTS AND RISKS 14 A. Investment Program Benefits and Beneficiaries 14 B. Technical Aspects 15 C. Financial Viability 15 D. Economic Analysis 16 E. Social Assessment 16 F. Environment Analysis 17 G. Risks 17

V. ASSURANCES 18 A. Specific Assurances 18 B. Counterpart Funding 18 C. Financial Management and Performance Indicators 18 D. Land Acquisition and Resettlement 19 E. Indigenous Peoples 19 F. Environment 19 G. Social Impacts 19 H. Execution of Civil Works Contracts 20 I. Condition for Loan Effectiveness 20

VI. RECOMMENDATION 20


Appendices Appendix 1 Design and Monitoring Framework Appendix 2 Gas Sector Assessment Appendix 3 Pipeline Rehabilitation Plan Appendix 4 Detailed Cost Estimates Appendix 5 Project Implementation Schedule Appendix 6 Past Financial Performance of MM and Afghan Gas Appendix 7 Financial Evaluation Appendix 8 Economic Analysis Appendix 9 Summary Poverty Reduction and Social Strategy Appendix 10 Summary Initial Environmental Examination Appendix 11 Development of Environmental, Health, and Safety Guidelines for the

Oil and Gas Sector in Afghanistan and Implementation Framework Appendix 12 Contract Packages

Supplementary Appendices (separate) A Initial Environmental Examination B Poverty and Social Assessment C Terms of Reference for Detailed Design and Construction Engineering Supervisory

Services

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LOAN AND PROJECT SUMMARY

Borrower Islamic Republic of Afghanistan

Classification Targeting Classification: Poverty intervention Sector: Energy Subsector: Natural gas Theme: Economic growth Subtheme: Promoting economic efficiency and enabling markets

Environment Assessment

The Project is classified as category B. An Initial Environmental Examination (IEE) has been completed. The summary IEE is in Appendix 10.

Project Description

The Project has four components: (i) construction of a gas transmission/distribution system for the town of Sheberghan, (ii) capacity building and institutional strengthening of Afghan Gas, (iii) creation of an agency to regulate oil and gas environmental health and safety issues, and (iv) creation of an agency to monitor oil and gas pricing.

Rationale The existing gas distribution system in the town is in poor condition and needs replacing. This will create a reliable market for proved reserves of natural gas that exist nearby. This market provides additional incentives for private sector development of the reserves. Development of the gas reserves, and a reliable gas supply in Sheberghan will lead to economic growth and a reduction in poverty in the region. Afghan Gas, which currently operates the fields and distribution network, will benefit from capacity building, particularly in business processes such as billing and collections. This will (i) enable them to expand profitably into other markets later, and (ii) make the company more attractive for subsequent privatization and sale. Improved regulatory capability of the Ministry of Mines will enable it to attract private business while simultaneously offering protection to residents of Afghanistan. ADB support is crucial in order to show that profitable operation of a gas transmission and distribution system is possible in Afghanistan. This demonstration will serve as a catalyst to inspire future investments by the private sector.

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Impact and Outcome

The main impact of the Project is supplying gas to support economic growth in and around Sheberghan. The primary outcome is to improve natural gas infrastructure, in particular a gas distribution network in Sheberghan and associated transmission line. The Project will also enhance the financial viability of Afghan Gas through capacity building, and sector governance by improving the capabilities of the Ministry of Mines. The Project complements the proposed tender of blocks containing producing gas fields by providing a reliable market for gas. The distribution network will serve about 15,000 households and 2,000 commercial establishments. The initial average daily gas rate is estimated to be about 110,000 m3/d (3.9 MMCFD), however the system will be designed with a capacity of about 850,000 m3/d (30 MMCFD) to accommodate seasonal variations and demand growth. A reliable supply of natural gas will encourage consumers to substitute away from other more expensive fuels, resulting in a reduction in poverty.

Cost Estimates The total cost of the project is estimated to be $25.9 million.

Financing Plan US$ million

Foreign Costs

Domestic Costs

Total Costs Percent

ADB Loan $22.65 $22.65 87% Local Funding

$3.25 $3.25 13%

Total $22.65 $3.25 $25.9 100% Loan Amount and Terms

The ADB currently has no funds budgeted for a loan for this project. If a loan is made from the Asian Development Fund, a Special Fund, then the loan will have a fixed-term 32-year maturity including a grace period of 8 years, a 1.0% interest during the grace period, and 1.5% during the amortization period, and equal amortization.

Allocation and Relending Terms

The loan will be re-lent to the Executing Agency

Period of Utilization

No funds are budgeted for 2008. Once approved, funds will be required for two years.

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Estimated Project Completion Date

Construction of the project is estimated to require two years. The system will then operate for at least twenty years.

Executing Agency

Ministry of Mines

Implementation Arrangements

The project will be undertaken by Afghan Gas under the guidance of a Project Implementation Unit at the Ministry of Mines

Procurement Procurement is to follow ADB guidelines.

Consulting Services

Consultants may be hired to assist with the construction, capacity building and institutional strengthening aspects of the Project.

Project Benefits and Beneficiaries

The Project will create an efficient and viable gas sector infrastructure in the town of Sheberghan. It will also strengthen the capacity of Afghan Gas and the Ministry of Mines. The Project will make clean energy available to about 65,000 people. This will lead to a decrease in the use of fuel wood, with a corresponding reduction in de-forestation and improvement in air quality. Improved air quality will particularly benefit women and the poor who are most vulnerable to the harmful effects of polluting biofuel use. Poverty will be reduced as consumers use natural gas instead or more expensive alternative fuels. The Project will create about 2000 person-months of job opportunities during construction of the distribution system, the majority of which will be for unskilled labor. It will also ensure the on-going viability of a restructured Afghan Gas that will provide on-going employment opportunities.

Risks and Assumptions

There is almost no risk about the existence of adequate gas reserves to support gas use in Sheberghan. Forecast gas usage in Sheberghan would be a small amount compared to the amount of proven gas reserves. However, there are several pre-requisites for success of the Project including: (i) gas production must be sufficient to satisfy demand, perhaps as a result of a successful tender of gas blocks near Sheberghan, (ii) a third party must construct a gas conditioning plant (perhaps as part of the proposed Sheberghan gas-fired power plant) to remove H2S.

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The security situation in the vicinity of Sheberghan has been relatively calm and stable. However, sabotage of gas facilities is a possibility. The political situation in Afghanistan is uncertain. Due to a lack of recent gas sector construction experience, the implementation capacity of the Ministry of Mines and Afghan Gas is weak.

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I. THE PROPOSAL 1. This report identifies a project that will promote development of the natural gas sector in Afghanistan. The project involves: (i) construction of gas transmission and distribution pipelines to deliver gas to residential and commercial customers in the town of Sheberghan, (ii) capacity building and institutional strengthening of Afghan Gas that will operate this system, (iii) creation of an agency to regulate oil and gas environmental health and safety issues, and (iv) creation of an agency to monitor oil and gas pricing, which may become a pricing regulator at some later date.

2. The Project was identified and prepared under the TA program of the Asian Development Bank (ADB). The Fact-Finding Mission for the Project was undertaken from July 5 to 10, 2005. The Project was formulated based on the findings of the TA1 consultants. The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

1. Natural Gas Resources 3. During the 1960s and 1970s specialists from the Soviet Union discovered and developed gas reserves2 near the town of Sheberghan in northern Afghanistan. Figure 1 shows the location of Sheberghan, and Figure 2 shows a map with the locations of oil and gas fields near Sheberghan.

1 TA4666 ADB 2006 Technical Assistance to the Islamic Republic of Afghanistan for Preparing the Natural Gas Development Project. Manila. 2 They also discovered oil reserves south of Sheberghan.

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Figure 1 Map of Afghanistan

Figure 2 Gas fields (red) and oil fields (green) near Sheberghan

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4. The Soviet estimate of gas reserves and cumulative gas production through 1 January 2003 is shown in Table 1. The table includes the Khoja Bulan field, which is not shown in the map although it is in the vicinity of Sheberghan. Seven gas fields were discovered, with total estimated reserves of 145 billion m3 (5.1 TCF). Gas has been produced from three of the fields: Khoja Gogerdag, Jarquduk and Yatimtaq. Cumulative production through 2002 has been about 56.6 billion m3 (2.0 TCF). This excludes gas lost during a blow-out from the Yatimtaq field. The produced fields are largely depleted.

Table 1 Discovered gas fields near Sheberghan

Field Soviet estimate of initial reserves

C1 + C2 billion m3

Year discovered

Start of production Cum. production through 1/1/2003

billion m3

Khoja Gogerdag 58.6 1961 1967 Hauterivian

1974 Aptian 41.5

Jarquduk 26.8 1971 1980 Hauterivian XIV

1985 Gaurdak XVa

14.6

0.5 Yatimtaq3 6.2 1960 2001 0.04 Sub-total 91.6 56.64 Juma 21.4 1974 NA 0 Jangali-Kolon

19.9 1979 NA 0

Bashikurd 9.6 1984 NA 0 Khoja Bulan

2.5 1964 NA 0

Total 145.0 56.64 5. In 2005, Gustavson Associates prepared an independent estimate of the remaining gas reserves as part of a contract4 with the Ministry of Mines and Industry. Table 2 shows that the estimated remaining reserves5 as of 1 January 2003 were 77.6 billion m3 (2.7 TCF).

3 Cumulative production excludes production during the 1960 blowout of well number 4. 4 Gustavson Final Report – Contract for the Promotion of Oil and Gas Producing Areas, July 2005 5 These are P50 reserves.

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Table 2 Gustavson estimate of remaining reserves as of 1 Jan. 2003

Field Remaining Reservesbillion m3

Khoja Gogerdak 16.77 Jarquduq 9.77 Yatimtaq 7.36

Juma 21.82 Jangali-kolon 13.38

Bashikurd 6.37 Khoja Bulan 1.95

TOTAL 77.6

6. The Khwaja Gogerdak structure, tectonically, is part of the northern Afghanistan basement structure. The structure is situated between the epi-platform and orogenic epi-platform. The structure is an east-west trending anticline where the north limb dips 8-15 degrees and the south limb dips 10-18 degrees. The lithology near the top of the Khoja Gogerdak structure consists of Cenozoic and Mesozoic sediments. Where Mesozoic rocks have been faulted out, Cretaceous sediments overly the Triassic unconformably. Triassic sediments are around 257 meters thick and are made of altered sandstone and argillites. Jurassic sediments are found in the middle and base of the structure, consisting of sandstones, shale and near the apex of the anticline some limestone. The Jurassic units in the area are about 115 meters thick. Upper Jurassic sediments at Hesar are of Caledonian–Oxfordian age and those at Gordak are of Kimmeridgian-Tetonian age. The two lithologic groups differ substantially from one another. The Caledonian-Oxfordian sediments consist of gray to dark gray dirty limestone often fractured and resting on the shale unit. It is 345-378 meters thick. The limestone suites in Khwaja Gogerdak and surrounding areas constitute the gas-bearing horizon. The sedimentary suite at Khwaja Gogerdak consists of layers of anhydrite separated by sandstone, shale and marl units and varies in thickness between 267 and 416 meters. Cretaceous sediments consist of upper and lower units. The lower Cretaceous sediments are of Valanginian, Hauterivian, Barimian, Aptian and Albian age, consisting of sandstone, shale, thin-bedded limestone, anhydrite and marl. Its thickness varies between 718 and 810 meters. In the Hauterivian, Aptian and Albian sediments accumulation of gas is found. Cenozoic sediments that overlie the Cretaceous, consist of Paleogene, Neogene and anthropogene sediments.

7. The Jarquduq structure contains Paleozoic, Mesozoic and Cenozoic lithologies. The gas reservoir is in Hauterivian Formations (Lower Cretaceous) and the oil is in Upper Jurassic. Lithologically at Jarquduq, the Hauterivian units are named Yarouse, and the upper Jurassic are consists of limestone. The gas producing Hauterivian and Yarouse sediments consist of sandstone separated by thin layers of clay and shales. Generally these units are 12.5 meters to 152.8 meters thick and the saturated zone is 1.6-91.8 meters thick. The Yarouse units are divided into four sub-units named from top down GA, GB,

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BC and GD. GA is made of dense clay about 20 meters thick and lacks a reservoir. The other sub-units are gas-bearing and have a porosity of 0.16 and a 75% saturation factor.

8. There is the potential for substantial new hydrocarbon discoveries in northern Afghanistan. In 2006, the US Geological Survey estimated6 the undiscovered hydrocarbon resources in the Amu Darya and Afghan-Tajik basins in northern Afghanistan to be in the range7 of 3.5 to 35 TCF of gas, 0.4 to 3.6 billion barrels of oil and 0.1 to 1.3 million barrels of natural gas liquids.

2. Institutional Framework 9. The Ministry of Mines (MM) is the administrative arm of the government that is responsible for the exploration and development of oil, gas and coal resources. Afghan Gas and the Oil and Gas Exploration Department (OGED) each report to MM. MM has six departments: administration, planning, oil and gas exploration, coal, Afghan Geological Survey (AGS) and a project implementation unit.

10. Afghan Gas is currently responsible for production, transmission and distribution of natural gas. It has five departments: secretariat, administration, head engineers, Kabul project coordination group, Mazar-e-Sharif project coordination group.

11. OGED is responsible for geological services and exploration for oil and gas, although current activity is limited due to a lack of modern equipment. It has five departments: Saripul oil field department, Kabul exploration project coordination group, head engineers, Mazar-e-Sharif warehouse and exploration department, and secretariat.

12. Recent financial information for the Ministry of Mines and Afghan Gas is shown in appendix 6.

B. Policy Briefing on the Natural Gas Sector 13. Several agencies including ADB, the World Bank and the Norwegian Agency for Development Cooperation (NORAD) have been involved in the development of policies relating to the natural gas sector in Afghanistan.

14. ADB awarded an Afghan gas sector TA 4354 that included a study on a gas regulatory framework for Afghanistan. That study included a draft gas law, and recommended establishment of a regulatory secretariat to manage economic and technical issues. ADB has also funded an Interministerial Commission for Energy (ICE) whose goal is to coordinate energy policy in Afghanistan, covering power, oil, gas, coal, rural electrification and liquid fuels. Coordination is necessary, since these sectors come under the purview of four Ministries: Electricity and Water, Mines, Rural Rehabilitation and Development and Commerce.

15. The World Bank has assisted in the development of a Hydrocarbon Law and associated Regulations. NORAD has also been active in the legal and regulatory spheres.

6 http://pubs.usgs.gov/of/2006/1095/pdf/of-2006-1095.pdf 7 The ends of the range of the resource estimates are F95 and F5 levels.

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Energy policy requires development and implementation of a legal and regulatory framework, as well as a determination of the respective roles of the public and private sectors.

C. Analysis of Key Problems and Opportunities

1. Post-Soviet Lack of Investment 16. The Soviets developed the gas fields primarily for export of gas to the Soviet Union, through what is now Uzbekistan. They built gas conditioning plants at Khoja Gogerdaq and Jarquduk for acid gas removal and gas dehydration, and partially completed a gas compressor plant. They also built a urea fertilizer plant near Mazar-e-Sharif with a capacity of 105 thousand metric tons per year. The fertilizer plant is fed by an 89 km underground pipeline with a diameter of 325 mm (12 inches).8

17. The gas production rate in the late 1970s was about 10 million m3 per day. When the Soviets departed the country in 1989, they took most of their records, killed and shut in all of the producing wells and temporarily abandoned the fields. The Afghans were able to recommence gas production.

18. The Afghans built a surface pipeline to the town of Mazar-e-Sharif that carried sour gas (containing H2S) for residential and commercial use, and also for use in generating power at the fertilizer plant. That surface pipeline ruptured due to thermal stresses and is no longer in use.

19. Gas production rates have declined as the reservoirs have become depleted. Average daily gas production rates from the months between December 2005 and July 2006 were between 400 and 460 thousand m3 per day9, less than 5% of the production rates during the late 1970s. Gas is supplied to the fertilizer plant and to residential and commercial customers in Sheberghan. The fertilizer plant operates at about 40% of capacity, due to a shortage of gas, and a lack of spare parts.10

20. Previous studies have reported gas losses due to leakage and theft to be as high as 30%.11 Data for 2005 and 2006 show that losses (defined as the difference between gas production and gas consumption) have been about 13%, and that losses in the pipeline to the Khud Berg plant have been very small.15 So there is considerable uncertainty about the actual gas loss rates.

2. Current Gas Distribution System 21. The gas conditioning plants are no longer operational, so gas delivered to Sheberghan consumers contains H2S, which is both corrosive and toxic (potentially deadly). The gas distribution network in Sheberghan was built “without considering any

8 p. 14 Final Report “Evaluation of Investment Options for the Development of Oil and Gas Infrastructure in Afghanistan”, Hill International, March 2005 9 Data provided by Afghan Gas during a Gustavson visit to Sheberghan in September 2006. 10 Data provided by fertilizer plant personnel during a Gustavson visit to the plant in September 2006. 11 “Technical Assistance to the Islamic Republic of Afghanistan for Preparing the Natural Gas Development Project” ADB, October 2005

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technical standards” 12. Afghan Gas personnel reported that “not-so-clean gas with water in the system gradually ruined the pipes”. This probably refers to corrosion caused by the H2S. The presence of H2S in gas distributed within the town of Sheberghan poses a health risk to residents. It is possible that gas leaks might lead to fatalities.

22. Furthermore, almost no gas meters are installed in Sheberghan. Customers are billed a fixed monthly rate for gas regardless of actual usage, and have no incentive to moderate their consumption. There are official prices for gas, but they are not very meaningful since gas usage is not measured.

23. There is an unused gas distribution network in Mazar-e-Sharif. We do not know about the condition of this network. We suspect that the condition is poor, since it was previously used to transport sour gas containing H2S, which is corrosive.

3. Current Institutions 24. The Ministry of Mines, formerly known as the Ministry of Mines and Industry, had 403 employees as of May 2004.13 The Ministry has Internet communications, but as of May 2004 had no legal or public relations departments.

25. Afghan Gas is responsible for operation of the fields and gas pipelines. They have 1088 staff, of which 332 are employees and 756 are laborers.14 The operations of Afghan Gas could probably be undertaken with a much smaller staff size. However, it is not clear what alternative job opportunities would be available for staff who were made redundant. The physical facilities of Afghan Gas are basic. It appears that most records are hand written. Maps of the gas pipeline networks are painted on a wooden board and are framed originals hanging on walls. Many employees have cell phones, and there are some computers and printers. Afghan Gas employees are keen to work to improve the availability of natural gas, and would benefit from improved facilities in order to do so.

26. The Oil and Gas Exploration Department had 1550 staff as of September 2006.15 This department is responsible for field development. However, a lack of equipment and resources has prevented such development from occurring. The department is a valuable repository of historical information about the oil and gas fields.

27. The Khud Berg fertilizer plant has a staff of 2500 people.15 The plant could almost certainly operate at its current level with a substantial reduction in staffing. However, it is not clear how any redundant workers would make up for the loss of the modest income that they currently earn based on employment at the plant.

4. Government Policies and Plans 28. The Ministry of Mines would like to encourage private investment in the natural gas sector in Afghanistan. The Ministry plans to issue a tender during the first quarter of

12 Translation of written response to Gustavson questions during Sheberghan visit. 13 “Review of Oil and Gas Institutional Structures Phase I”, Mary Louise Vitelli for IBRD, May 2004. 14 Reported in 6/23/07 email from Khyber Omerkhel, domestic consultant. 15 Reported to visiting Gustavson team in September 2006.

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2008 for the award of two blocks. The two blocks are the Juma-Bashikurd and Jangalikolon blocks shown on Figure 3.

Figure 3 Map showing proposed gas tender blocks

29. The figure shows several other blocks also, but there are no current plans to make those available to the private sector. There were previous plans to tender the Jar Quduk and Yatimtaq-Khoja Gogerdaq blocks, possibly together with the obligation to rehabilitate certain wells and pipelines, funded by a previously allocated ADB emergency loan, EIRRP 1997. These plans appear to be on hold.

30. Success of the tender will be influenced by the existence of current or potential markets for the gas. The two current markets are the fertilizer plant and the town of Sheberghan. Neither of these markets is reliable in the long term. The fertilizer plant is old and lacks spare parts; the gas distribution network in Sheberghan is in poor condition.

31. USAID funded a feasibility study for a gas-fired power plant and a gas conditioning plant in the area, which has been completed. The gas conditioning plant would remove H2S from the produced gas, and would be oversized to allow for sales of gas outside the power plant. Further work on the power plant is contingent on confirmation of sufficient gas reserves and gas production rates for the plant. A USAID subcontractor is in the process of issuing a tender for work to provide such confirmation.

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32. This report assumes that a gas conditioning plant with sufficient capacity to serve Sheberghan will be built and financed separately, and that Afghan Gas will be able to purchase conditioned gas at outlet from the conditioning plant. Any delay in operation of such a plant would delay operation of the proposed Sheberghan distribution network.

33. Two large-scale projects have been proposed previously, either of which would have a significant impact on the natural gas sector in Afghanistan. An energy sector review and gas development master plan was published in 2004.16 This master plan proposed construction of a gas pipeline from the gas fields to Kabul and Jalalabad, together with gas distribution networks in those towns and other towns along the route. There appears to be no current activity for implementation of this plan, probably due to the high estimated capital cost of about $1.3 billion. The other major project is the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, which would transport much-needed gas to Pakistan and India. The TAPI pipeline has geopolitical implications because there is also a proposal for a gas pipeline from Iran to Pakistan and India. The TAPI project has been under discussion since 1995, and is still the subject of high-level meetings. However, construction of the TAPI pipeline does not appear to be imminent. If the TAPI pipeline were built, it would probably pass through the western part of Afghanistan, in which case it would not have a direct impact on the gas fields in the vicinity of Sheberghan. However, development of Sheberghan area gas fields and the ensuing capacity building would create Afghan gas sector expertise that would be beneficial in discussions and creation of TAPI.

III. THE PROPOSED PROJECT

A. Outputs 34. The project consists of both physical capital and human capital. The physical capital is construction of a new gas distribution network in the town of Sheberghan, a transmission line from outlet of the gas conditioning plant in the fields to the town, and a gas compressor at inlet to the transmission line. The new distribution network will serve about 70,000 people living in 15,000 residential households and 2,000 commercial customers, such as restaurants and bakeries. It will replace the existing network that is not built to any international standards, and is in bad condition. In order to ensure optimal use of this physical capital, the project also includes investment in human capital, namely capacity building and institutional strengthening of Afghan Gas. The institutional strengthening will include organizational design and implementation, new physical infrastructure, and modern technology such as “Supervisory Control And Data Acquisition” and computerized billing and collection systems. The capacity building will be training in technical and business skills so that the New Afghan Gas will be capable of operating as an economically sustainable business.

35. The final output will be the development of two groups at the Ministry of Mines: one that develops, monitors and enforces environment, health and safety (EHS) guidelines, and another that monitors natural gas prices. The EHS guidelines will be developed in conjunction with international consultants. 16 ADB TA4088, prepared by SofreGaz/Energy Markets

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B. Impact and Outcome

1. Physical Impacts 36. This is a small project. It can be viewed as a pilot project that will initiate improvement of the natural gas sector in Afghanistan. This small-scale project will be manageable, and will provide learnings that can be implemented in future projects that will undoubtedly occur.

37. The direct benefits will be a reliable and safe supply of gas to the town of Sheberghan, and creation of an economically sustainable natural gas distribution company. Delivered gas will no longer contain toxic H2S, removing a health risk currently faced by residents of the town. The economic sustainability of the New Afghan Gas company will lead to on-going good and secure jobs, and will encourage private investment in the upstream components of the gas sector. There will also be new business opportunities for companies to sell, install and repair gas appliances, such as cookers, water heaters, and home heating units. The project will also lead to a substantial temporary demand for labor services for construction of the distribution system.

38. The project will create a sustainable small market for natural gas. The anchor customers for natural gas production will be industrial customers, namely the proposed gas-fired power plant and the Khud Berg fertilizer plant. However, successful implementation of a distribution system in Sheberghan will surely provide incentives for gasification of the nearby town of Mazar-e-Sharif, which will have about triple the consumption of Sheberghan. Both of these projects may be precursors for construction of a gas pipeline to Kabul and Jalalabad, as envisaged in the gas sector master plan.

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2. Policy Outcomes COMPONENT Short-term

(5 years) Medium-term (15 years)

Long-term (25 years)

Policy Outcome 1: Segregate and reassign policy-making, regulatory and ownership functions 1.1 Gas sector policy

Create planning department at MM

Planning department maintains statistics about gas sector and makes projections about future development & energy needs

1.2 Environment, health and safety (EHS)

Create EHS department at MM Create EHS standards & guidelines Monitor and enforce standards & guidelines

Revise standards & guidelines as necessary Monitor and enforce standards & guidelines

1.3 Afghan Gas Conduct capacity building Restructure organization for profitability Build and operate transmission and distribution for Sheberghan and Khud Berg

Expand into other markets, e.g., Mazar-e-Sharif, CNG vehicle fuel Corporatize company and sell to private sector

Owned and operated as a private sector firm

Policy Outcome 2: Gas sector pricing 2.1 Price regulation

Establish price regulation agency Agency monitors, but does not set, prices

Agency decides whether to regulate pipeline tariffs, and regulates as appropriate

Policy Outcome 3: Sector restructuring and private sector participation 3.1 Gas production

Tender(s) to private sector companies for rights to produce gas from known fields

Government exploration of remote areas, e.g., seismic On-going tenders for gas blocks

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3.2 Gas transmission

Afghan Gas operates limited transmission network

Afghan Gas privatized Other private investment in transmission

Private sector owns and operates extensive transmission network

3.3 Gas distribution

Afghan Gas builds and operates Sheberghan distribution network

Afghan Gas builds and operates new distribution networks, e.g., Mazar-e-Sharif

Afghan Gas, other private companies and/or municipal utilities operate many gas distribution networks

C. Technical Justification and Selection Criteria 39. The recommended project will provide gas to residential and commercial consumers in Sherberghan. The project is urgently needed since the current distribution system is in poor condition and carries toxic and corrosive H2S. The following criteria were used to justify the project: (i) technical feasibility, (ii) financial and economic viability, (iii) environmental and social improvement, (iv) modest investment.

D. Project Preparation, Implementation and Monitoring Capabilities 40. Afghan Gas can benefit from training in modern gas production and pipeline operations, as well as business and accounting systems for profitable operation. Such capacity building is recommended, and will enhance Afghan Gas’ ability to prepare for and collaborate in construction of the recommended project.

41. The training will also assist Afghan Gas in its ability to operate and monitor the finished system. Afghan Gas will need skills for (i) general business management, as well as project and program management, (ii) technical operation and maintenance, (iii) accounting, financial and economic management, and financial reporting, (iv) contracting, procurement and inventory management, (v) management information systems, (vi) price setting, (vii) feasibility studies and project design.

E. Special Features 42. The project will be located in the town of Sheberghan in northern Afghanistan. This is the location both of the proposed new distribution network and the offices of Afghan Gas. The proposed gas transmission line will connect the gas conditioning plant to the town. The precise location of the conditioning plant has not been determined. It will probably be at the same site as the proposed Sheberghan power plant, which may be near the Jarquduk field.

43. The project will result in several types of technology transfer. Afghan Gas will gain experience in modern construction techniques and materials for gas distribution networks. They will also gain experience in operation of a modern pipeline network, and

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become aware of Western style business processes and methods for running economically sustainable operations.

44. Sector governance will be modest at first focusing on health, safety and environmental impacts. It is suggested that price regulation not be implemented at this time, in order to simplify initial development of the market. Price regulation may be implemented at a later date.

45. There will be several immediate environmental benefits. There will be air quality improvements due to increased use of natural gas rather than fuel wood, which will reduce the amount of particulate emissions. This will also lead to reduced deforestation. In addition, removal of H2S from the delivered gas will eliminate the risk of poisoning in the event of gas leaks.

46. The new gas distribution network may lead to a reduction in methane leakage, with a potential for financial benefits under the Clean Development Mechanism (CDM) that is part of the Kyoto protocol. Afghanistan must first sign the Kyoto Protocol in order to participate in the CDM. The country must also establish a Designated National Authority (DNA) for the CDM. The DNA should be established within the National Environmental Protection Agency. The country of Afghanistan will need to establish a baseline greenhouse gas (GHG) emission inventory in order to become a signatory of the Kyoto Protocol.

47. Once Afghanistan has become a signatory of the Kyoto Protocol, the DNA will be able to take the lead in monetizing (selling) project carbon emission reductions (CERs) by (i) identifying eligible CDM projects, (ii) preparing CDM Project Design Documents (PDD), (iii) validating and registering projects with the CDM Executive Board, (iv) implementing projects and (v) monitoring, verifying and certifying project emission reductions.

F. Cost Estimates 48. The total project cost is estimated to be $ 25.9 million, excluding price contingency and financial charges such as interest during construction.

14


Table 3 Cost Estimate ($ million)

Component Foreign Exchange Local Currency Total

Cost % Total Cost % Total Cost % A. Gas Pipelinesa A1 Transmission line $6.4 28% $0.7 22% $7.1 27%A2 Sheberghan distribution network $7.7 34% $1.9 58% $9.6 37%B. Capacity Building B1 Afghan Gas $1.9 8% $0.1 3% $2.0 8%B2 MM – EHS $1.9 8% $0.1 3% $2.0 8%B3 MM – Price monitoring $0.95 4% $0.05 2% $1.0 4%C. Contingencies C1 Physical $2.3 10% $0.2 6% $2.5 10%C2 Price $1.5 7% $0.2 6% $1.7 7%

Total $22.65 100% $3.25 100% $25.9 100%a 2007 prices

G. Financing Plan 49. At this time there is no financing plan. This document may be used in order to attract financing for the project.

H. Implementation Arrangements 50. The Ministry of Mines or Afghan Gas will manage the tender process for construction of the Sheberghan distribution network, and associated compressor and transmission line. They will interface with the PMU at the Ministry of Mines. The estimated time for the tender process and construction is about 23 months (see appendix 5).

51. Procurement, consulting services, disbursement arrangements, accounting/auditing/reporting, project review/performance and monitoring/evaluation will be performed in accordance with ADB guidelines. The executing and implementing agencies will also follow ADB guidelines concerning governance and corruption.

IV. Project Benefits, Impacts and Risks

A. Investment Program Benefits and Beneficiaries 52. The Investment Program is designed to provide a reliable and safe supply of natural gas to residential and commercial consumers in the town of Sheberghan. This will lead to social and economic benefits for the population of about 70,000 people. It will also result in capacity building of Afghan Gas, which will prepare that company for implementation of additional projects in the future.

15


B. Technical Aspects 53. Gas production and consumption between December 2005 and July 2006 ranged between 400 and 460 thousand m3 per day. 17 Gas is currently only consumed by the Khud Berg fertilizer plant and residential and commercial customers in the town of Sheberghan. We estimate that demand would increase to about 1.4 million m3 per day if the proposed 100 MW gas-fired power plant is built near Sheberghan, the fertilizer plant is able to continue operations (despite its age and lack of spare parts) and if gas is provided to the nearby town of Mazar-e-Sharif. Detailed demand and supply forecasts are discussed in appendix 2.

54. The Ministry of Mines plans to conduct a tender offer in the first quarter of 2008 for the rights to produce gas from two blocks: Juma-Bashikurd and Jangali-Kolon. It is anticipated that a private oil and gas firm will win the tender offer, and be responsible for gas production from those fields.

55. The best short-term option is for the gas producer to be allowed to sell gas at unregulated prices to any interested buyer. The more obvious alternative is to regulate prices. This requires establishment of an agency for regulating prices, which does not currently exist in Afghanistan. The expertise for such an agency is lacking at this time. The likely buyers include the proposed power plant and Afghan Gas. Without a pricing regulator, the gas seller(s) and buyers will be able to negotiate prices without intervention by a third party.18 Afghan Gas will be responsible for transporting and reselling gas to the fertilizer plant and in the town of Sheberghan. It will be necessary for Afghan Gas to build a new distribution system in Sheberghan, and a transmission line from the gas fields to the town (approximately 24 km), because of the poor condition of the current system. The proposed project is construction of this new system together with capacity building and restructuring of Afghan Gas to enable it to function as a profit-making firm.

56. At some future date, the then profitable Afghan Gas may be sold to the private sector. However, in the immediate future, Afghan Gas will be a state-owned company. This strategy for Afghan Gas accomplishes multiple goals. First, it creates a reliable market for produced gas.19 Secondly, the government of Afghanistan will be able to privatize Afghan Gas later, and receive a higher price for the then successful company.

C. Financial Viability 57. The financial analysis has been undertaken based on the guidelines in “Financial Management and Analysis of Projects” (ADB 2005). The financial analysis was conducted in real terms with constant 2007 prices. Presence of a reliable gas market in Sheberghan will influence the outcome of the upcoming tender for gas blocks. However, the decision concerning this project will be made after the tender for gas blocks has occurred. So this project is evaluated as an incremental project, where the incremental 17 TA4666 Revised Interim Report, Gustavson Associates, June 2007 18 Enabling the gas producer to sell to multiple buyers reduces the monopsony power that would exist with a single buyer. Afghan Gas will have a natural monopoly for gas distribution in Sheberghan. However, its pricing power will be restricted by the presence of alternative fuels. 19 Some have suggested that the private sector should undertake transportation and distribution of gas. However, there is no evidence that the private sector will be interested.

16


impact is gas sales to residential and commercial customers in Sheberghan. The benefit is the sale of gas to those customers at an assumed price of $200 per thousand m3. There is an additional benefit that is not modeled, namely the reduction in health risk due to removal of toxic H2S from the delivered gas. The costs include expenses for operating the pipeline network and Afghan Gas, the expense of purchasing gas at outlet from the gas conditioning plant, the capital cost for construction of the network and Afghan income taxes at a rate of 30%. The analysis is done on a project basis, and therefore includes no debt or interest expense.

58. The after tax financial internal rate of return (FIRR) is estimated to be 12% (see Appendix 7). Sensitivity analyses were run for changes in capital cost, operating cost, the price at which gas is sold to customers, and the price paid for gas at outlet from the gas conditioning plant. The economics are most sensitive to the delivered price of gas. A 10% decrease in the delivered price causes the FIRR to drop to 9.8%. A 10% increase in capital cost causes the FIRR to drop to 10.9%. A 10% increase in operating costs causes a small drop in the FIRR to 11.9%. A 10% increase in the purchase price of gas causes the FIRR to drop to 11.2%.

D. Economic Analysis 59. Gas demand in Sheberghan was forecast based on data about the current number of households and commercial establishments from Afghan Gas, and estimates of gas usage per establishment and the aggregate demand growth rate. The analysis assumes that the existing distribution system will not be able to continue operations due to its poor condition. The cost of the new distribution system was based on a preliminary design to meet peak gas demand. Seasonal demand means that any distribution network will rarely be used at capacity.

60. The economic rate of return (EIRR) was calculated for the project to assess its economic viability. Values are expressed in 2007 prices. The economic benefit is the value of the avoided use of alternative fuels such as firewood and LPG. The costs considered were capital cost, operating cost (without gas purchase) and a depletion premium for use of the natural gas resource. The EIRR is estimated to be 28% (see Appendix 8). Sensitivity analysis shows the EIRR to be robust.

E. Social Assessment

1. Poverty Assessment 61. The project will have both income and non-income impacts on poverty reduction. The income impacts are (i) new businesses will develop in response to the reliable supply of natural gas, leading to increased employment opportunities and a wider rage of goods and services, (ii) gas use will increase, ensuring incentives for additional gas production that may be used for fertilizer, power and other gas-intensive industries, (iii) households will experience time savings since energy in the form of natural gas is instantaneously available, in contrast to the need to purchase bottled gas and/or firewood, (iv) natural gas is cheaper than alternative fuels, and (v) employment opportunities during construction and operations. Non-income impacts include (i) controlled depletion of forest resources,

17


(ii) empowering women by creating new income opportunities, and (iii) establishing a social infrastructure that will provide better services such as health care and education.

2. Resettlement 62. The proposed project will not require resettlement of any people, since the proposed system can closely follow the existing system, which it will replace.

F. Environment Analysis 63. The project will result in the following significant environmental improvements: (i) the gas distributed within Sheberghan will no longer contain toxic levels of H2S, reducing a potential health risk to inhabitants, (ii) reduction in methane leakage20, and (iii) a reliable gas supply in Sheberghan will encourage customers to substitute gas for fuel wood, reducing deforestation.

64. Construction of the new gas distribution network in Sheberghan will cause temporary disruption as streets will be temporarily closed in order to lay piping. Construction efforts will create temporary nuisances including dust and noise. There should not be any long-term adverse environmental consequences.

65. We recommend that environmental, health and safety guidelines be developed and implemented for the oil and gas sector in Afghanistan. Appendix 11 contains a proposal for accomplishing this. The estimated cost is about $700,000 total for guidelines and establishing and implementation framework.

G. Risks 66. There are several risks associated with the project:

Technical risk: technology for gas distribution networks is well understood, and relatively low risk. There is a small risk of accidents during construction, and also of possible line cuts by other contractors during operations.

Gas supply risk: There is a possibility that the tender of gas blocks may be unsuccessful, in which case there would be no private companies responsible for producing gas. However, the outcome of the gas block tender will be known before it is necessary to make a decision concerning construction of the gas distribution network.

Gas conditioning plant risk: There is a possibility that construction of the proposed Sheberghan gas-fired power plant and associated gas conditioning plant may be delayed. If this occurs, then either another party will need to condition the gas for use in Sheberghan, or the availability of suitable gas will be delayed.

Bad debt: It is possible that gas customers may delay or refuse payment of their gas bills.

Gas policy risk: Gas pricing regulation might be implemented once the new distribution network is in place. This could have positive or adverse impacts on the economics of gas distribution in Sheberghan.

20 There are conflicting reports about the amount of methane leakage to the atmosphere. However, the current gas pipeline to and within the town of Sheberghan is above ground and is in poor condition.

18


Foreign exchange risk: A significant portion of the material for the distribution network and the cost of skilled labor cost and project management will be paid in foreign currency. The loan for the project will be denominated in a foreign currency. However, gas pricing is likely to be in local currency, Afghanis. If the Afghani were to devalue relative to foreign currencies, then this would present a challenge concerning loan repayment, unless gas prices rose in local currency.

Security risk: Sheberghan is located in the north of Afghanistan, which has experienced only infrequent security incidents in the last few years. However, on 28 May 2007 militias loyal to different factions clashed in Sheberghan resulting in several deaths.21 Gas pipelines are possible targets for sabotage.

V. Assurances

67. There is currently no budget for a loan for this project. However, this section of the report lists assurances that are recommended in the event that a loan is eventually made.

A. Specific Assurances 68. Policy Dialogue. The Government will ensure that ADB is kept informed about the Government’s policies and programs related to the natural gas sector that will materially affect the financial viability of the Sheberghan gas distribution and transmission system.

69. Tariff. The Government will notify ADB of any proposal to regulate the price of natural gas or tariffs associated with transportation of natural gas by pipeline.

B. Counterpart Funding 70. The Government will ensure the availability and release of counterpart funding for the timely implementation of the project.

C. Financial Management and Performance Indicators 71. Responsible Party Afghan Gas will receive loan funds from the Government and be responsible for their repayment to the Government.

72. Financial Performance. The Government will ensure that Afghan Gas maintains a level of debt service coverage that is acceptable to the ADB.

73. Financial Autonomy. The Government will ensure that Afghan Gas bills its customers for delivered gas and services received in a timely manner. In the event that Afghan Gas experiences a shortfall in its ability to make repayments on its loan, the Government will finance such shortfall in a timely manner.

74. Auditing and Accounting. Afghan Gas will maintain proper accounts and records in a timely manner to adequately identify the use of loan proceeds in such manner and details as may be specified in the Loan Agreement. Audited financial reports of Afghan Gas will be submitted to ADB within 6 months of fiscal year end. 21 http://news.bbc.co.uk/2/hi/south_asia/6697299.stm

19


75. Financial Governance. Afghan Gas will ensure that its internal controls are in accordance with National Accounting Standards and an independent and autonomous internal audit department will be set up within Afghan Gas.

D. Land Acquisition and Resettlement 76. Afghan Gas will ensure that (i) all land and rights-of-way required by the project are made available in a timely manner; (ii) if any resettlement is required, then ADB will be notified, and it will done in accordance with all applicable laws and regulations of Afghanistan and ADB’s Policy on Involuntary Resettlement (1995).

E. Indigenous Peoples 77. Afghan Gas will ensure that any impact of the project on ethnic minorities will be conducted in accordance with ADB’s Policy on Indigenous Peoples (1998) as specified in the Indigenous Peoples Development Framework (IPDF) agreed with ADB and the Indigenous Peoples Development Plans (or resettlement plans). Afghan Gas will ensure that any impact on ethnic minorities is monitored and evaluated by an independent agency.

F. Environment 78. Afghan Gas will ensure that (i) the project is constructed and operated in accordance with national and local environmental procedures and guidelines, and with ADB’s Environment Policy; (ii) the project is designed, constructed, and operated in accordance with environment management plans (EMPs) as reflected in the initial environment examination; (iii) the EMPs will be incorporated in the bidding documents and civil works contracts and implemented; and (iv) environmental performance reports will be submitted to ADB twice annually during the construction period, including progress made on mitigation measures, monitoring data, problems encountered, enforcement plan, and any violations.

G. Social Impacts 79. Gender Afghan Gas will follow the principles of ADB’s policy on gender and development during project implementation, including taking all necessary actions to encourage women living in the project area to participate in planning and implementing project activities. Afghan Gas will monitor project effects on women during project implementation through, where relevant, gender dis-aggregated data collected pursuant to the performance monitoring system.

80. Sexually Transmitted Diseases With the assistance of the relevant local authorities, Afghan Gas will cause contractors to distribute information on the risk of sexually transmitted diseases to those employed during project construction.

81. Women and Child Labor Afghan Gas will ensure that (i) there is no differential payment between men and women for work of equal value, and (ii) civil works contractors do not employ child labor in the construction and maintenance activities in accordance with the relevant laws and regulations of the Government.

20


H. Execution of Civil Works Contracts 82. Afghan Gas will ensure that no part of a civil works contract will be handed over to the contractor if resettlement is required, without ADB approval, and that EMPs have been complied with.

83. Any changes to the location, land alignment of facilitating roads, or environmental impacts on account of detailed designs will be subject to prior approval by ADB or related agency.

I. Condition for Loan Effectiveness 84. Corporate Governance The Government will ensure that no person serving on the board of Afghan Gas is a board member of any company that does business with Afghan Gas to avoid any actual or apparent conflict of interest.

VI. Recommendation 85. The Ministry of Mines should continue efforts to tender gas blocks, and encourage and monitor construction of a gas-fired power plant and gas conditioning facility near Sheberghan.

86. If both of these efforts will be successful, then the Government of Afghanistan should request loan funding for the project described in this report. If funds are available from ADB, then they would probably be Special Funds with an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years.

87. Upon receipt of funding, the following should be undertaken

o Tender for detailed design and construction of a gas distribution network to supply Sheberghan

o Implement institutional strengthening and capacity building at Afghan Gas o Create an environment, health and safety group within the Ministry of

Mines o Establish an agency to monitor natural gas pricing within the Ministry of

Mines

Appendix 1 21


Appendix 1: Design and Monitoring Framework Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact Economic development by expansion of conventional natural gas supplies

Increase in per capita income in Sheberghan

National statistics Assumptions Availability of per capita income data for Sheberghan

Risks Difficult to separate out the benefit of natural gas from factor changes

Outcome Enhanced use of natural gas by residential and commercial users

Afghan Gas generates profit within 2 years of start of new Sheberghan gas distribution network 15,000 residential and 2,000 commercial users of gas in Sheberghan within 5 years of start of new network

Audited financial statements from Afghan Gas

Assumptions Availability of conditioned natural gas Gas distribution system is properly operated and maintained No major equipment failures Afghan Gas improves billing and collections

Risks Payment delays Sabotage actions Mechanical accidents, explosions

Outputs 1. New gas pipeline

Up to 850,000 m3/d of natural gas (with H2S concentration below 4

Progress reports, review missions and financial

Assumptions Successful tender of gas

Appendix 1 22


infrastructure to serve Sheberghan 2. Financially self-supporting New Afghan Gas company 3. Reduction in health risk due to delivery of pipeline quality gas through new distribution network

ppm) is available for consumption by residential and commercial customers in Sheberghan Gas distribution

network within Sheberghan and gas compression/transmission line to Sheberghan completed within 23 months of initiation Gas is available at least

99% of the time Gas usage is metered,

and usage-based bills are generated. Collection rates in excess of 90%

reports of Afghan Gas Project

completion reports

blocks 3rd party construction of gas conditioning plant Bid period and construction phase are well-managed

Risks Delay/failure of gas block tender No 3rd party construction or delay of gas conditioning plant Security issues

Activities with Milestones 1. Preparation of network bid documents 2. Approval of bid documents 3. Bidding 4. Bid evaluation and contract award 5. Construction of gas distribution network and transmission line

Inputs $25,900,000 (unknown source)

Appendix 2 23


Appendix 2: Gas Sector Assessment Overview 1. Natural gas has been produced near Sheberghan since the 1960s. Gas continues to be produced from three fields, and there are proved gas reserves in other nearby fields. Gas is used by a fertilizer plant near Mazar-e-Sharif, about 90 km from the fields, and by residential and commercial consumers in Sheberghan. Existing wells and pipelines are in poor condition due to a lack of investment. Gas delivered in Sheberghan contains H2S, which is toxic and corrosive. ADB has approved about $24 million for rehabilitation of gas wells and pipelines. However, two previous attempts to tender for this work have been unsuccessful.

2. There are sufficient gas reserves to continue serving gas to existing consumers for decades and to provide fuel for a proposed gas-fired 100 MW power plant, for which a feasibility study has been completed. USAID is currently considering bids for a program to rehabilitate and test gas wells. This program may lead to construction of the power plant. The power plant will include a gas conditioning plant for removal of H2S, with sufficient excess capacity to serve the town of Sheberghan.

3. The Ministry of Mines oversees natural gas activities. Afghan Gas is a department of the Ministry and is currently responsible for natural gas operations. The Ministry intends to issue a tender inviting private sector firms to develop gas fields. Success of this tender will be contingent on the prospect of reliable and profitable gas sales. Neither the fertilizer plant nor the current distribution network in Sheberghan is reliable due to their age and poor condition.

4. Development of natural gas resources in Afghanistan is an attractive business opportunity because the country currently relies on imports for almost all of its energy needs. Residential and commercial consumers pay high prices for alternative fuels. A new gas distribution network in Sheberghan will be more reliable. Capacity building at the Ministry of Mines and Afghan Gas will occur in connection with construction and operation of this new network. This capacity building will serve as a foundation for future projects.

Sector Policy 5. It is desirable to obtain significant private sector participation in the natural gas sector. This has several benefits. The private sector will bring technical and business process expertise. In addition, the private sector can be responsible for identifying financing for its projects. Upstream oil and gas firms are familiar with risk taking, due to the intrinsically uncertain nature of the business. However, the gas sector in Afghanistan has an unusual set of risks. Uncharacteristically, there is little risk associated with the gas reserves due to the extensive previous exploration work. The main risk is associated with natural gas demand and willingness to pay. Some of this market risk can be reduced if the government of Afghanistan agrees to undertake construction of a new gas distribution network in the town of Sheberghan, which is close to the gas fields. The private sector is unlikely to be interested in building such a network, since there is no record of prior success of such a project in Afghanistan.

Appendix 2 24


6. The World Bank and Norad have been active in assisting with development of a hydrocarbon law and regulations. These are important for establishing a framework under which private sector oil and gas development firms will operate.

Major Stakeholders 7. The major stake holders are

• Ministry of Mines (MM) – responsible for the oil and gas sector in Afghanistan

• Afghan Gas – a department of MM responsible for the current operation of the gas fields, Sheberghan gas distribution system and the Khud Berg fertilizer plant

• Oil and Gas Exploration Department –responsible for oil and gas development, but currently lacking equipment

• Asian Development Bank – interested in developing the gas sector; has approved an emergency loan for rehabilitation of wells and pipelines

• World Bank – interested in supporting the country of Afghanistan

• US Agency for International Development (USAID) – has proposed construction of a 100 MW gas-fired power plant near Sheberghan; currently considering award of a field testing rehabilitation program to confirm the amount of gas reserves as a precursor to power plant construction.

• Gas consumers in Sheberghan – currently using unreliable supply of gas containing H2S

• Afghanistan Ministry of Finance – would be responsible for gas sector loans from multilateral banks; would collect income tax revenue associated with development of the sector

Sector Issues 8. The country of Afghanistan is desperately short of electricity and it imports almost all of its energy. The natural gas resources near Sheberghan have the potential to ameliorate both of these issues. A feasibility study for a gas fired power plant has been completed. The North East Transmission system is being built to bring power from Uzbekistan and Tajikistan to Kabul. This system could be used to carry domestically generated power also.

9. Residential and commercial consumers in Afghanistan are using a variety of energy sources for heating, cooking and lighting, including fuel wood, charcoal and

Appendix 2 25


bottled gas. These are relatively expensive on an energy equivalent basis. Such consumers could save money by buying natural gas, and would be willing to do so if a reliable supply were available.

10. The gas sector master plan considered a gas pipeline from Sheberghan over the Hindu Kush mountains to Kabul. Such a system is unlikely to be built soon because of its high cost. Currently natural gas in only delivered to Sheberghan and the Khud Berg fertilizer plant near Mazar-e-Sharif. Gas used to be delivered to residential and commercial consumers in Mazar-e-Sharif, but the gas line has ruptured. The gas distribution network in Sheberghan is in bad condition because the gas contains corrosive H2S.

11. It is economically feasible to build a new distribution network for the town of Sheberghan, providing that there are also large industrial anchor customers for the gas, such as the fertilizer plant and the proposed gas-fired power plant. For safety reasons, it is important that H2S be removed from the gas stream. The power plant feasibility study included a gas conditioning plant with excess capacity for this purpose.

Demand Forecast 12. Average daily gas consumption over the months between December 2005 and July 2006 ranged between 400 and 460 thousand m3 per day.22 Consumption in the town of Sheberghan was about 160 thousand m3 per day in the cooler months of December, January and February, and about 50 thousand m3 per day in March through July. Fertilizer plant consumption was about 370 thousand m3 per day in March through July, and 240 to 290 thousand m3 per day in December through February. These data suggest that gas consumption is limited by the productive capacity of the existing wells. Gas consumption by residential and commercial customers in Sheberghan is about 3 times higher in the cooler winter months, than in the summer months. Rather than increase total gas production in the winter months, supply to the fertilizer plant seems to be curtailed in order to accommodate the higher demand in Sheberghan.

13. The actual future demand for gas will depend on the gas infrastructure that is built, as well as other factors such as price and the price of alternative fuels. For the purpose of a demand forecast, it is helpful to define the concept of potential demand, namely the demand if gas were available in a particular market. Gas is currently available in Sheberghan and for the fertilizer plant, so their potential demands are the same as their actual demands, assuming no demand growth. Table A2.1 shows an estimate of the gas demand in northern Afghanistan that could materialize within the next several years if gas were available and if the Sheberghan power plant is built.

22 TA4666 Revised Interim Report, Gustavson Associates, June 2007

Appendix 2 26


Table A2.1 Estimate of the Potential Gas Demand in Northern Afghanistan23

Potential Gas Demand Thousand m3 /day

Sheberghan 110 Mazar-e-Sharif 310 Fertilizer plant 400 Sheberghan power plant 600 Total 1420

14. Figure A2.1 shows a forecast of gas usage in northern Afghanistan, based on the potential demands and assumptions about the timing of construction of gas infrastructure and residential/commercial gas usage adoption rates.

0

500

1000

1500

2000

2500

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-23

Thou

sand

m3 /D

Figure A2.1 Forecast of Gas Usage in Northern Afghanistan

15. The figure is based on the following assumptions:

Khud Berg fertilizer plant continues operations New Sheberghan distribution network is complete on 1 July 2010 100 MW Sheberghan power plant begins operation on 1 July 2010 Transmission and distribution system for Mazar-e-Sharif is complete on 1 July

2012 A second 100 MW gas-fired power plant begins operation on 1 July 2014

16. Based on this forecast, total gas usage from 2007 through 2021 would be about 7.2 billion m3.

23 TA4666 Revised Interim Report, Gustavson Associates, June 2006

Appendix 2 27


Reserves 17. There are seven known gas fields in the Sheberghan area. There has been production from three of the fields: Khoja Gogerdak, Jarquduk and Yatimtaq. The remaining four fields are undeveloped. In 2005, Gustavson Associates prepared an estimate of the remaining reserves.24 The results are shown on Table A2.2. There were about 77. 6 billion m3 of remaining reserves as of 1 January 2003. The three developed fields contain about 33.9 billion m3. Cumulative production between 1 January 2003 and 1 July 2007 is estimated to be less than 1 billion m3.

Table A2.2 Gas reserves as of 1 Jan. 2003

Field Remaining Reservesbillion m3

Khoja Gogerdak 16.8 Jarquduq 9.8 Yatimtaq 7.4

Juma 21.8 Jangali-kolon 13.4

Bashikurd 6.4 Khoja Bulan 2.0

TOTAL 77.6

Supply Scenario 18. There are many possible field development scenarios that can satisfy the demand forecast. Figure A2.2 shows a hypothetical gas supply scenario that satisfies the demand. The demand can be satisfied solely from the three currently developed fields. However, there are no current plans to actually implement this development program. The supply scenario assumes that 1 new well would be drilled to the Jurassic Kogitan reservoir at Khoja Gogerdaq in 2008. In addition, there are assumed to be workovers at 3 wells at Yatimtaq and 1 at Jarquduk. The Yatimtaq workovers would complete the wells in the Hauterivian reservoir. The scenario also assumes that another well would be drilled at Khoja Gogerdaq, two wells would be worked over at Jarquduq and 1 at Yatimtaq in 2018. In total this constitutes 2 new wells and 7 workovers. This is a modest development program.

19. The average concentration of H2S in the produced gas increases over time as more gas is produced from the Jurassic Kogitan formation, as shown in the figure. The average H2S concentration is forecast to remain below 2.5% through 2027. This has implications

24 P50 reserves from Gustavson Final Report – Contract for the Promotion of Oil and Gas Producing Areas, July 2005

Appendix 2 28


for the design of a gas conditioning plant. The Sheberghan power plant feasibility study25 assumed that the H2S concentration would be no higher than 1.25%.

Afghanistan Gas Supply Forecast

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007 2012 2017 2022 2027

Mill

ions

m3 /d

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

% H

2 S

Avg Old Gas Rate Avg New Gas Rate Max Gas Rate

Total Demand Average H2S Content

Figure A2.2 Gas Supply Forecast

Roles of Private Sector and Government 20. The recommended roles of various parties in development of the natural gas sector in Afghanistan are:

Private Sector: Develop gas fields, and produce gas. Sell gas to power plant and Afghan Gas. Possible new industrial uses of gas, e.g., brick kilns, compressed natural gas

Donors: Fund construction of Sheberghan power plant and gas conditioning plant. Responsibility for operation is not clear at this time. Government: Afghan Gas builds and operates new gas distribution network in Mazar, and

supplies gas to Khud Berg fertilizer plant. Ministry of Mines awards gas blocks to private companies, develops and enforces

environmental, health and safety regulations New independent regulatory agency develops over time. Initially monitors

pricing. Subsequently initiates price regulation for natural monopolies, e.g., transmission and distribution

25 “Feasibility of Development of a Gas-Fired Thermal Power Facility in Sheberghan Afghanistan”, AEAI March 2006.

Appendix 2 29


Market Structure 21. There is very limited capability for administering economic regulation in Afghanistan. In addition, the natural gas sector is not well developed. Consequently, we propose an unorthodox market structure with no price regulation initially. This has the benefit of simplicity to encourage development of the sector. It may also allow firms to temporarily earn supra-normal profits, which will provide them with an additional incentive to enter a market that is likely to be perceived as high-risk. Our proposal relies on competition to the greatest extent possible.

Gas producer(s) may sell gas to any willing buyer, including but not limited to

Afghan Gas and the Sheberghan power plant. Buyers and seller(s) negotiate prices, which may differ across buyers. Gas producers are not required to sell all production to Afghan Gas to prevent Afghan Gas from becoming a monopsonist.

Afghan Gas sets prices for gas delivered to its customers, including residential and commercial customers in Sheberghan, and the fertilizer plant. Afghan Gas does not have unlimited market power over residential and commercial consumers, since there are alternative fuels.

Financial Issues 22. The estimated cost to build the new pipeline system and implement capacity building at Afghan Gas and the Ministry of Mines is $25.9 million. There are currently no funds budgeted by ADB for this project.

23. A supply of natural gas with an acceptably low concentration of H2S is a pre-requisite for implementation of this project. This report assumes that a third party will build and operate a gas conditioning plant for H2S removal. If that is not the case, then additional capital would be required to cover the cost of a conditioning plant.

Gas Supply/Distribution Issues 24. The current gas distribution network is in poor condition, and the concentration of H2S in the delivered gas is both corrosive and toxic. This illustrates the need for a new system.

25. The current official prices for natural gas are 1.25 Afs per m3 ($25 per thousand m3) for the fertilizer plant and 3 Afs per m3 ($60 per thousand m3) for residential consumers. However, the volume of gas usage by each residential and commercial customer is not metered. Instead, Afghan Gas charges residential and commercial customers a flat monthly fee that is based on estimated gas usage. This report recommends that gas sellers and buyers should determine the actual delivered price of gas in the future, rather than price being set by regulation. It also shows that the recommended project has an acceptable financial return if the gas price is about $200 per thousand m3. The Ministry of Mines has expressed concern that such a price may be perceived as too high compared to current official prices. A consumer marketing campaign may be necessary to demonstrate that consumers will be able to save money

Appendix 2 30


compared to their current purchases of fuel wood and natural gas by buying natural gas even at prices in the range of $200 per thousand m3.

Investment Plan for the Sector 26. Development of the proven reserves requires investment in both the upstream and downstream. USAID has received responses to a tender for testing and rehabilitation of certain wells at Yatim Taq and Jarquduk. This work has the potential to provide sufficient gas for the gas fired-power plant and demand at Sheberghan and Khud Berg. Approximately $24 million of additional funds are available as part of an ADB emergency loan package for rehabilitation of pipelines and wells.

27. The Ministry of Mines has also expressed an interest in funds for an exploration program to identify new oil and gas prospects in northern Afghanistan.

28. The feasibility study for a gas-fired power plant included a gas conditioning plant with sufficient excess capacity for Sheberghan and Khud Berg. The power plant and conditioning plant might be funded by grant funds or as a public-private partnership.

29. Funding for the Sheberghan gas distribution network will require additional funds that are not currently budgeted or approved. The gas demand associated with this network will make upstream development more attractive to the private sector.

Appendix 3 31


Appendix 3: Pipeline Rehabilitation Plan

1. In 2003 ADB approved $20 million for rehabilitation of certain gas wells and pipelines.26 The RRP described the work to be undertaken as follows “(i) provision for two mobile rigs to carry out workover activities for 12 gas wells; (ii) provision for two complete well wire line units to carry out down-hole flow tests; (iii) supply and installation of one skid–mounted gas sweetening plant; (iv) two containerized gas production testing laboratories; (v) repair and reconstruction of corroded gas transmission lines including pigging facilities and condensate disposal; (vi) repair and reconstruction of corroded gas distribution lines including installation of city gate station; (vii) cathodic protection system for corrosion mitigation of transmission and distribution pipelines; (viii) chemicals, tools, equipment, spare parts, instrumentation, piping and assemblies, and vehicles; (ix) consulting services for design, engineering, contract management, and construction supervision; (x) contracting services for gas well rehabilitation, repairs, and reconstruction of gas transmission and distribution facilities; and (xi) institutional strengthening and training of the Ministry of Mines and Industries (MMI) and Afghan Gas.”

2. There were two attempts to tender this work, both of which were unsuccessful. Now, this work may be bundled together with the rights to produce gas from two blocks in the upcoming tender.

3. The pipeline rehabilitation work will probably be on the 89 km underground pipeline to the Khud Berg fertilizer plant. There is a second surface pipeline that used to carry sour gas for residential and commercial use in Mazar-e-Sharif. A weld on that pipeline ruptured due to thermal stress, and it is probably not a candidate for rehabilitation. There is a gas distribution network in Mazar. There are no current or proposed plans to rehabilitate that network.

4. This project recommends construction of a new transmission line from the fields to Sheberghan and a new distribution network within the town of Sheberghan. This would be in place of rehabilitating the existing system, which is in poor condition.

26 RRP: AFG 36673 “REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE TRANSITIONAL ISLAMIC STATE OF AFGHANISTAN FOR THE EMERGENCY INFRASTRUCTURE REHABILITATION AND RECONSTRUCTION PROJECT” ADB May 2003

Appendix 4 32


Appendix 4: Detailed Cost Estimates 1. A preliminary design for a gas distribution network in Sheberghan was created in order to estimate the construction cost. The estimated cost is $20.9 million, as shown on Table A4.1. The network was designed to service about 15,000 residences and 2,000 commercial customers. A design was needed to determine pipe lengths and operating pressures that would influence the selection of pipes and other equipment for the network. The estimate includes costs for

Two compressors near the gas conditioning plant A transmission line from the compressors to the town A distribution network within the town Connections and meters for all customers27

2. A gas distribution network was set up that utilized roads for access to home and business lots, as shown on Figure A4.1. The system consists of two 6 inch diameter trunklines that feed off of a branched 8 inch diameter trunkline that will bring gas from the gas conditioning plant assumed to be located about 24 km south of town. In Sheberghan, the 6 inch pipelines connect to 4 inch diameter lines and then to 2 inch diameter distribution lines. Customer lines are not included on the map. These are ½ inch diameter lines for homes and ¾ inch diameter lines for businesses that would feed off of the 2 inch distribution lines to the individual structures to be gasified. These customer service lines are not shown on the map due to their large number. Lengths for these were estimated to be a minimum of 25 meters each for 17,000 lines, with some extra pipe material included.

27 In some countries, customers would cover the capital cost of their connection to a distribution network. However, this cost could be a deterrent to widespread use of gas in this town with a low per capita income. We propose that the connection and meter cost for Sheberghan customers be recouped together with all of the other costs out of usage-based customer payments for gas. Subsequent gasification of other towns may use some other approach for cost recovery.

Appendix 4 33


Figure A4.1 Preliminary Design of Sheberghan Gas Distribution Network

3. Using a pressure loss estimate of 0.4 psi/100 feet and the longest pipeline route laid out, a maximum pressure loss of about 58 psi was estimated. Adding in a minimum 8 psi at the exit of the 2 inch lines gave a pressure of 66 psi. This is the minimum pressure required for the gas as it enters the distribution system in Sheberghan. An additional pressure of about 60 psi is estimated to be needed to allow transportation of the gas from the gas source at a planned gas conditioning plant through an 8” diameter transmission pipeline and into the 6” distribution pipeline. Maximum estimated pressures for the different sizes of pipelines are estimated to be about 125 psi for the 8” transmission line, about 65 psi for the 6” distribution line, 40 psi for the 4” distribution line, 25 psi for the 2” distribution line, and 8 psi for the ½” and ¾” customer lines. The network was sized for peak daily gas demand to accommodate seasonal usage. Peak demand was estimated to be about 30 MMCFD (850,000 m3 per day). This is based upon 15,000 homes supplied with a peak use of 0.51 MCFD (14.4 m3 per day) each and 2000 businesses supplied with a peak use of 10 MCFD (283 m3 per day) each.

4. The cost estimate involved identifying types of materials and quantities that would be required for the project and then obtaining price estimates from suppliers before calculating material costs for the project. This approach also requires estimates of construction crews, construction rates and labor costs. The material prices obtained are generally FOB (free-on-board) in Houston, Texas, where the materials could be loaded onto a ship and shipped to an appropriate port for ground transport into northern

Appendix 4 34


Afghanistan. Some items, such as customer service equipment including meters, regulators, and meter loops were obtained in other cities, but the prices are likely to be the same in Houston. Cost estimates were obtained for materials that included polyethylene pipes, compressors, regulators, valves, odorizers, and meters.

5. Information about the cost of materials was obtained from several US vendors. The vendors also provided estimates of installation labor requirements for some items. Gustavson estimated the labor requirements for pipeline construction. The workforce was assumed to be a mix of international and domestic employees, and included a provision for security. Skilled workers were estimated to earn an annual salary of $150,000. The unskilled worker labor income was estimated to be $250 per month28.

6. A project location escalator was applied to the material portion of the network cost. This factor, estimated at 30%, was included to account mainly for transportation costs, both sea and land, of the project. A 25% contingency was added to the cost estimate to account for unforeseen costs. The estimated cost is US$ 20.9 million, i.e., about $1400 per household, as shown on Table A4.1.

28 From a report on local labor rates prepared by domestic consultant Khyber Omerkhel.

Appendix 4 35


Table A4.1 Detailed Construction Cost Estimate

ItemLength (m) or Number (each)

Unit Price (US$/m or US$)

Material Cost (US$)

Labor (man hours)

Labor Cost (US$)

Material + Labor (US$)

Transmission SystemTransmission - 8" Pipeline 24,200 $38.15 $923,146 36,300 $674,323 $1,597,469Tansmission - Compressors 2 $1,500,000 $3,000,000 400 $25,750 $3,025,750Transmission - Valves in 8" pipe 2 $14,003 $28,006 incl. in pipeln. incl. in pipeln. $28,006Odorizer and Other Associated Equipment 1 $2,000 $2,000 160 $3,313 $5,313Other Equipment and Supplies 1 $320,000 $320,000 incl. in pipeln. incl. in pipeln. $320,000Project Location Escalator NA 30% $1,281,946 NA NA $1,281,946*Other Costs NA 18% NA NA $895,777 $895,777

Transmission System Subtotal $5,555,098 36,860 $1,599,162 $7,154,260

Distribution GridDistribution Grid - 2" Pipeline 42,000 $2.41 $101,422 17,638 $174,541 $275,963Distribution Grid - 4" Pipeline 10,000 $8.72 $87,160 5,999 $59,368 $146,527Distribution Grid - 6" Pipeline 7,000 $18.87 $132,060 9,799 $96,967 $229,027Distribution Grid - Regulators 4" to 2" 100 $673 $67,300 incl. in pipeln. incl. in pipeln. $67,300Distribution Grid - Regulators, 6" to 4" 15 $8,229 $123,435 incl. in pipeln. incl. in pipeln. $123,435Distribution Grid - Valves in 2" pipe 100 $1,953 $195,300 incl. in pipeln. incl. in pipeln. $195,300Distribution Grid - Valves in 4" pipe 15 $2,633 $39,495 incl. in pipeln. incl. in pipeln. $39,495Distribution Grid - Valves in 6" pipe 2 $5,933 $11,866 incl. in pipeln. incl. in pipeln. $11,866Other Equipment and Supplies 1 $100,000 $100,000 incl. in pipeln. incl. in pipeln. $100,000Project Location Escalator NA 30% $257,411 NA NA $257,411*Other Costs NA 18% NA NA $214,004 $214,004

Distribution Grid Subtotal $1,115,450 33,436 $544,880 $1,660,330

Distribution and Transmission Total $6,670,548 70,296 $2,144,042 $8,814,590

Customer LinesCustomer Lines - 1/2" 400,000 $0.47 $188,986 146,982 $1,428,988 $1,617,974Customer Lines - 3/4" 75,000 $0.68 $51,184 27,559 $267,935 $319,119Customer Regulators 17,000 $15 $255,000 68,000 2,709,375$ $2,964,375Customer Meters 17,000 $50 $850,000 incl. with regs. incl. with regs. $850,000Customer Meter Loops 17,000 $20 $340,000 incl. with regs. incl. with regs. $340,000Other Equipment and Supplies 1 $150,000 $150,000 incl. in lines incl. in lines $150,000Project Location Escalator NA 30% $550,551 NA NA 550,551*Other Costs NA 18% NA NA $1,123,464 $1,123,464

Customer Lines Subtotal $2,385,720 242,541 $5,529,762 $7,915,482

Total Materials Cost $9,056,268Total Labor Cost $7,673,804

Total Project Cost without Contingency $16,730,072Contingency 25% $4,182,518

Total Project Cost with Contingency $20,912,590

* Other includes costs associated with right of way, damages, surveying, engineering, supervision and administration

Gasification Project Construction Cost Summary

Appendix 5 36


Appendix 5: Project Implementation Schedule

The estimated schedule is shown below. The project has four components:

• Award and construction of the gas distribution and transmission system • Capacity building at Afghan Gas • Establishment of an Environment, Health and Safety group at the Ministry of Mines • Establishment of a natural gas price monitoring group at the Ministry of Mines

0 4 8 12 16 20 24

Issue bid document and bidding period

Bid evaluation

Contract award

Detailed design by supplier

Procurement & construction

Afghan Gas Institutional Strengthening

MM - Envt, health, safety group

MM - Price monitoring group

Months

Appendix 6 37


Appendix 6: Past Financial Performance of MM (EA) and Afghan Gas (IA) 1. This appendix has data about historical and budgeted performance for the years 1384 (2005) through 1386 (2007). Afghanistan uses a Persian calendar. The year starts on 21 March. For example, year 1384 runs from 21 March 2005 through 20 March 2006.

Ministry of Mines

Table A6.1 Ministry of Mines Expenditures ($)

Description 1384 1385 Salaries $3,233,000 $2,654,620 Admin and Repair $ 449,200 $ 700,000 For purchase of land, building and Equipments

$ 800 $ 220,000 Total $3,683,000 $3,574,620

Source: Ministry of Mines

Table A6.2 Ministry of Mines Development Expenditures – 1384

Projects Financing Agency Amount $millionIDTI ( to develop gas sector) ADB $ 0.50 Rehabilitation of Sheberghan Gas and Pipeline Transmission from Sheberghan to Mazar

ADB $ 3.60 Technical Assistance for review of Gas Regulation

ADB $ 0.23 Coal Project of North Government of AFG $ 5.00 Aerial Geologic Survey (USGS) Government of AFG $ 8.86 Development Research on underground recourses of Kabul River

Japan $ 2.09 Construction of Mosque in MMI Government of AFG $ 0.02 Providing and Transportation of Coal for Winter (loan) Government of

AFG(MoF) $ 2.00 Copper Project of Aynak Government of AFG $ 0.45 Total $ 22.75


Appendix 6 38


Table A6.3 Ministry of Mines Development Expenditures – 1385

Projects Amount $million Development of Gas and Oil Fields in Jawzjan $ 0.050 Consultation Services $ 0.193 Rehabilitation of Sheberghan Gas Field and Pipeline Transmission from Sheberghan to Mazar

$ 0.800 Coal Project of Karkar, Khord Dari Ahan and Coal Mine of Harat $ 4.000 Copper Project of Aynak

$ 1.050 Aerial Geologic Survey (USGS) $ 8.540 Project for Supply of Equipments of Water Supply and Related Laboratory $ 0.500 Development Project for Natural Resources $ 3.000 To Extinguish Fire in Coal Mine of Dari Souf $ 0.500 Total $ 18.633

Source: Ministry of Mines Afghan Gas

Table A6.4 Afghan Gas P&L

Actual Budget $'000 1384 1385 1386

Sales $ 3,382 $ 4,326 $ 4,620

Cost of Goods Sold Raw material and spare parts $ 135 $ 679 $ 678 Fuel and lubricants $ 58 $ 406 $ 417 Electricity $ 274 $ 440 $ 386 Salaries $ 961 $ 1,089 $ 1,311 Depreciation $ 400 $ 800 $ 900 Other expense $ 222 $ 199 $ 159

Total $ 2,049 $ 3,613 $ 3,850

Operating Profit $ 1,333 $ 713 $ 770 Other Income $ 91 $ 60 $ 60 Total Net Profit $ 1,424 $ 773 $ 830 Net Production for Sale, million m3 143 144.2 154


Appendix 7 39


Appendix 7: Financial Evaluation A. Introduction

1. A financial analysis has been undertaken based on the guidelines in “Financial Management and Analysis of Projects” (ADB 2005). The recommended project is construction of a gas distribution network in the town of Sheberghan and a transmission pipeline to the town, together with capacity building and restructuring of Afghan Gas so that it can operate as a financially sustainable firm.

2. As of the date of this report, a tender is planned for the rights to produce gas from the fields in Sheberghan, but has not been undertaken. The chance of success of that tender will be higher if potential bidders are aware of the potential gas market in Sheberghan. So it could be argued that the evaluation of this project should include some positive benefit associated with the increased chance of tender success. However, the tender will probably have already occurred by the time a decision is made concerning the project that is the subject of this report. So a fair evaluation approach for the project is to consider it as an incremental project, namely with this project the natural gas sector will include a market in Sheberghan, whereas without it there will be no such market.29

B. Assumptions 3. The financial analysis is conducted in real terms with constant prices. The benefit is the sale of gas to residential and commercial customers in Sheberghan. There is an additional benefit that is not modeled, namely the reduction in health risk due to removal of toxic H2S from the delivered gas. The costs include expenses for operating the pipeline network and Afghan Gas, the expense of purchasing gas in the field, the capital cost for construction of the network and Afghan income taxes at a rate of 30%. The analysis is done on a project basis, and therefore includes no debt or interest expense.

4. Detailed assumptions are as follows

Price paid by residential gas customers: $200 per thousand m3 Price paid by commercial gas customers: $200 per thousand m3 Price paid for gas at inlet to the transmission line: $2.00 per MCF ($56.48

per thousand m3) Variable operating expense: $10 per thousand m3 Fixed operating expenses: $1 million per year Tax life of assets: 15 years Pipeline network construction in 2008 and 2009 Pipeline start-up: 1 Jan. 2010 at full capacity 30 years of cash flows 2008 – 2037 Salvage value of assets: 40% of initial capital cost

29 As of the writing of this report, there are current gas sales in Sheberghan. So one could argue that this project has no incremental benefit. However, Afghan Gas has recommended replacement of the existing gas distribution network in Sheberghan due to its poor condition. Thus it is reasonable to consider that gas sales in Sheberghan do constitute an incremental benefit.

Appendix 7 40


Discount rate: 12%, after tax

C. Weighted Average Cost of Capital and Financial Internal Rate of Return 5. Appendix 9 of the ADB RRP for project 40043 related to an Afghanistan-Tajikistan regional power interconnection project prepared in November 2006 reports that the weighted average cost of capital (WACC) in Afghanistan is 0%. This is a very unusual value for the WACC, which is an average after tax cost of debt and equity weighted by relative amounts of debt and equity. The cost of both debt and equity are usually strictly positive because investors require a return for making their funds available for some period of time. However, we will report the same WACC of 0% as in that report.

6. The financial internal rate of return is estimated to be 12%, as shown on Table A7.1.

Appendix 7 41


Table A7.1 Financial Analysis

Financial Analysis US$

thousand

Year Capital O&M BenefitsBefore Tax Cash Flow

Income Tax

After Tax Cash Flow

2008 $ 10,900 $ - $ - $ (10,900) $ - $(10,900) 2009 $ 10,000 $ - $ - $ (10,000) $ - $(10,000) 2010 $ 5,000 $ 3,942 $ 7,300 $ (1,642) $ 489 $ (2,131) 2011 $ - $ 4,001 $ 7,446 $ 3,445 $ 516 $ 2,930 2012 $ - $ 4,060 $ 7,592 $ 3,532 $ 542 $ 2,991 2013 $ - $ 4,118 $ 7,738 $ 3,620 $ 568 $ 3,052 2014 $ - $ 4,177 $ 7,884 $ 3,707 $ 594 $ 3,113 2015 $ - $ 4,236 $ 8,030 $ 3,794 $ 620 $ 3,174 2016 $ - $ 4,301 $ 8,191 $ 3,890 $ 649 $ 3,241 2017 $ - $ 4,367 $ 8,354 $ 3,988 $ 678 $ 3,309 2018 $ - $ 4,434 $ 8,522 $ 4,087 $ 708 $ 3,379 2019 $ - $ 4,503 $ 8,692 $ 4,189 $ 739 $ 3,450 2020 $ - $ 4,573 $ 8,866 $ 4,293 $ 770 $ 3,523 2021 $ - $ 4,644 $ 9,043 $ 4,399 $ 802 $ 3,597 2022 $ - $ 4,717 $ 9,224 $ 4,507 $ 834 $ 3,673 2023 $ - $ 4,792 $ 9,408 $ 4,617 $ 867 $ 3,750 2024 $ - $ 4,867 $ 9,597 $ 4,729 $ 901 $ 3,828 2025 $ - $ 4,945 $ 9,789 $ 4,844 $ 1,453 $ 3,391 2026 $ - $ 5,024 $ 9,984 $ 4,961 $ 1,488 $ 3,472 2027 $ - $ 5,104 $ 10,184 $ 5,080 $ 1,524 $ 3,556 2028 $ - $ 5,186 $ 10,388 $ 5,201 $ 1,560 $ 3,641 2029 $ - $ 5,270 $ 10,595 $ 5,325 $ 1,598 $ 3,728 2030 $ - $ 5,355 $ 10,807 $ 5,452 $ 1,636 $ 3,816 2031 $ - $ 5,442 $ 11,023 $ 5,581 $ 1,674 $ 3,907 2032 $ - $ 5,531 $ 11,244 $ 5,713 $ 1,714 $ 3,999 2033 $ - $ 5,622 $ 11,469 $ 5,847 $ 1,754 $ 4,093 2034 $ - $ 5,714 $ 11,698 $ 5,984 $ 1,795 $ 4,189 2035 $ - $ 5,809 $ 11,932 $ 6,123 $ 1,837 $ 4,286 2036 $ - $ 5,905 $ 12,171 $ 6,266 $ 1,880 $ 4,386 2037 $ (10,360) $ 6,003 $ 12,414 $ 16,771 $ 1,923 $ 14,848

FIRR 12%Source: GA estimates

D. Sensitivity Analysis 7. Table A7.2 shows how the financial internal rate of return varies with respect to changes in capital cost, operating cost, the price paid by end users for gas (gas sales price), and the price paid by Afghan Gas for gas (gas purchase price).

Appendix 7 42


8. The FIRR is most sensitive to the gas sales price and to the capital cost. It is moderately sensitive to the gas purchase price, and not very sensitive to operating costs. The base case FIRR is 12 %, so any increase in capital cost, gas purchase price or operating cost, or any decrease is gas sales price would result in an FIRR below a 12% threshold. However, 10% changes in any of these parameters results in a positive FIRR (above the WACC), so in that sense the project economics are robust.

Table A7.2 Sensitivity Analysis of Financial Internal Rate of Return

FIRR Parameter | Change -10% 10%Capital 13.3% 10.9%Operating costs 12.1% 11.9%Gas sales price 9.8% 14.0%Gas purchase price 12.7% 11.2%

Appendix 8 43


Appendix 8: Economic Analysis

1. The economic analysis is on the basis of constant real prices, except for the depletion premium.

A. Estimation of Costs 2. The costs included in the economic evaluation are

Capital cost, including materials and labor (construction and project management)

Operating expenses for the gas distribution network, Afghan Gas and gas production in the field

Depletion premium30 to account for using up of the natural gas resource, based on a blended average price of alternative fuels of $718 per thousand cubic meters in 2037.

3. Note that there is no wellhead price for gas, since the wellhead price is a payment to the producer, which generates revenue offsetting the purchase cost, netting out in an economic evaluation. Also, the economic evaluation does not include income taxes, since such taxes are a redistribution of value to the government sector, and do not affect the total overall economic impact of the project. Taxes have an important distributional impact, but the economic analysis does not consider distributional effects.

B. Estimation of Benefits 4. The benefit of the project is non-incremental energy use. We assume that the natural gas used for residential and commercial purposes in Sheberghan will replace other fuels including fuel wood, LPG, charcoal, coal and kerosene. The average price of these fuels, weighted31 based on the estimated proportions of households using each fuel type, is $323 per thousand cubic meters.

C. Estimation of Economic Internal Rate of Return 5. The economic internal rate of return is estimated to be about 28%, as shown on Table A8.1.

30 The depletion premium is calculated as described in Appendix 6 of “Guidelines for the Economic Analysis of Projects” ADB, Feb. 1997 31 The weights are taken from "Energy Sector Review and Gas Development Master Plan TA 4088-AFG" SofreGaz, Energy Markets, June 2004 Exec Summary Table 1, p.6

Appendix 8 44


Table A8.1 Economic Analysis

Economic Analysis US$ thousand

Year Capital O&M Costs Total Cost BenefitsNet

Benefits2008 $ 10,900 $ - $ 10,900 $ - $(10,900)2009 $ 10,000 $ - $ 10,000 $ - $(10,000)2010 $ 5,000 $ 3,616 $ 8,616 $11,790 $ 3,174 2011 $ - $ 3,818 $ 3,818 $12,025 $ 8,207 2012 $ - $ 4,045 $ 4,045 $12,261 $ 8,216 2013 $ - $ 4,300 $ 4,300 $12,497 $ 8,197 2014 $ - $ 4,586 $ 4,586 $12,733 $ 8,147 2015 $ - $ 4,907 $ 4,907 $12,968 $ 8,061 2016 $ - $ 5,277 $ 5,277 $13,228 $ 7,951 2017 $ - $ 5,695 $ 5,695 $13,492 $ 7,797 2018 $ - $ 6,170 $ 6,170 $13,762 $ 7,592 2019 $ - $ 6,708 $ 6,708 $14,037 $ 7,330 2020 $ - $ 7,318 $ 7,318 $14,318 $ 7,000 2021 $ - $ 8,012 $ 8,012 $14,605 $ 6,593 2022 $ - $ 8,800 $ 8,800 $14,897 $ 6,096 2023 $ - $ 9,697 $ 9,697 $15,195 $ 5,498 2024 $ - $ 10,716 $ 10,716 $15,498 $ 4,782 2025 $ - $ 11,877 $ 11,877 $15,808 $ 3,932 2026 $ - $ 13,198 $ 13,198 $16,125 $ 2,927 2027 $ - $ 14,702 $ 14,702 $16,447 $ 1,745 2028 $ - $ 16,417 $ 16,417 $16,776 $ 359 2029 $ - $ 18,371 $ 18,371 $17,112 $ (1,259)2030 $ - $ 20,598 $ 20,598 $17,454 $ (3,144)2031 $ - $ 23,137 $ 23,137 $17,803 $ (5,334)2032 $ - $ 26,033 $ 26,033 $18,159 $ (7,874)2033 $ - $ 29,336 $ 29,336 $18,522 $(10,814)2034 $ - $ 33,105 $ 33,105 $18,893 $(14,212)2035 $ - $ 37,404 $ 37,404 $19,270 $(18,134)2036 $ - $ 42,311 $ 42,311 $19,656 $(22,655)2037 $ - $ 47,910 $ 47,910 $20,049 $(27,862)NPV $ 21,263 $ 48,883 $ 70,146 $86,919 $ 16,773

EIRR 27.9%Source: GA estimates

D. Sensitivity and Risk Analysis 6. Table A8.2 shows how the EIRR varies with respect to the capital cost, the operating cost and the economic value of gas. The EIRR is most sensitive to changes in the economic value of gas and the capital cost. It is not very sensitive to changes in operating costs.

Appendix 8 45


TableA8.2 Sensitivity Analysis of Economic Internal Rate of Return

EIRR Parameter | Change -10% 10%Capital 31.2% 25.1%Operating costs 28.5% 27.3%Gas economic value 22.6% 32.5%

Appendix 9 46


Appendix 9: Summary Poverty Reduction and Social Strategy

A. Linkages to the Country Poverty Analysis Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No Contribution of the sector/subsector to reduce poverty: The proposed project is a small pilot program that will lead to direct benefits for about 63,500 people in the town of Sheberghan. The project will accomplish two goals: (i) provide a reliable and safe supply of natural gas to the town, and (ii) establish an economically sustainable New Afghan Gas company. The company will provide employment income. The supply of natural gas will benefit both residential and commercial customers. The lower cost of natural gas compared to other fuels will reduce poverty. However, accurate metering of actual gas usage might increase customer payments compared to the current fixed rate billing system regardless of usage. All residents of the town will experience health benefits, as clean-burning natural gas replaces other fuels, and will be no longer be subject to the risk of potential poisoning by H2S. Commercial customers will benefit by having a reliable supply of natural gas, ensuring continuity of their business operations. There is one inevitable negative consequence: suppliers of alternative fuels will be adversely affected by the increased availability of natural gas. Successful implementation of the pilot program will lead to subsequent expanded use of gas in other locations. New Afghan Gas will be able to implement the skills and business processes learned in Sheberghan in other markets. The presence of an economically sustainable New Afghan Gas company will provide an incentive for additional production of natural gas to support the additional markets. B. Poverty Analysis Targeting Classification: Poverty intervention What type of poverty analysis is needed? The project will have both income and non-income impacts on poverty reduction. The income impacts are (i) new businesses will develop in response to the reliable supply of natural gas, leading to increased employment opportunities and a wider rage of goods and services, (ii) gas use will increase, ensuring incentives for additional gas production that may be used for fertilizer, power and other gas-intensive industries, (iii) households will experience time savings since energy in the form of natural gas is instantaneously available, in contrast to the need to purchase bottled gas and/or firewood, (iv) natural gas is cheaper than alternative fuels, and (v) employment opportunities during construction and operations. Non-income impacts include (i) controlled depletion of forest resources, (ii) empowering women by creating new income opportunities, and (iii) establishing a social infrastructure that will provide better services such as health care and education. C. Participation Process Is there a stakeholder analysis? Yes No Members of Afghan Gas, the Oil and Gas Exploration Department, and the Ministry of Mines provided data to the project team, as part of the fact-finding for the project. There was no broad survey of other stakeholders. Since there is currently no budget for an ADB loan to this sector, it was deemed unwise to raise expectations of the likelihood of a project. Is there a participation strategy? Yes No If funds become available, it is strongly recommended that stakeholders, such as local government and business leaders, be involved in decision-making about the project. This will result in a project that is better aligned with actual needs, and will reduce possible unanticipated resistance towards the project.

Appendix 9 47


D. Gender Development Strategy to maximize impacts on women: The impact on women is expected to be positive. There will be time savings in households due to reduced effort for fuel purchases. Also, Afghan Gas may provide employment for women, and the availability of reliable natural gas supplies may create additional employment opportunities for women. Has an output been prepared? Yes No E. Social Safeguards and Other Social Risks Item Significant/ Not

Significant/ None Strategy to Address Issues Plan

Required Resettlement Significant

Not significant

None

The project will involve extensive physical construction. However, the distribution network can be laid underneath streets, so no relocation should be necessary.

Full

Short

None Affordability Significant

Not significant

None

The project will increase access to cheap fuel in the project area.

Yes

No

Labor Significant

Not significant

None

The project will create temporary job opportunities during construction and on-going opportunities during operations. Additional job opportunities will arise as new businesses are created that take advantage of the reliable gas supplies.

Yes

No

Indigenous peoples

Significant

Not significant

None

There are nomadic Kuchi people in Afghanistan. However, this project is unlikely to affect their lifestyle, since their nomadic lifestyle is not conducive to use of natural gas, and development of the natural gas sector will be over small geographical regions that will not impede their nomadic travel

Yes

No

Other risks and/or vulnerabilities

Significant

Not significant

None

A potential social risk is the lack of capacity of the implementing agencies. It will be important to increase the capacity of Afghan Gas for increasing awareness of health issues related to possible natural gas leakage and explosion. The project will result in removal of H2S from the gas, which reduces the current risk faced by residents of Sheberghan.

Yes

No

Appendix 10 48


Appendix 10: Summary Initial Environmental Examination32

A. Introduction

1. An Initial Environment Examination (IEE) is shown in a supplementary appendix. This is a category B project. According to the ADB 2003 Environmental Assessment Guidelines, and IEE is regarded as the final environmental assessment report. This appendix discusses a summary of potential environmental impacts and mitigation measures.

B. Summary IEE Findings – Impacts and Management Plan

Table A10.1 Potential Impacts

Activity Potential Impacts Severity DurationPre-Construction/Testing Phase Land acquisition Loss of land and crops M P Clearing of access road Loss of vegetation M T Construction/Testing Phase Dust emission from excavated soil

Air quality M T

Dust emission from movement of vehicles

Public nuisance N T

Emission of smoke from vehicles

Air pollution N T

Noise from vehicles and equipment

Noise and vibration M T

Excavation of soil and land leveling

Erosion M T

Mixing fertile soil with unfertile subsoil

Loss of fertility N to M T

Discharge of toxic wastes Soil degradation due to pollution N to M T Movement of heavy vehicles

Soil compaction Loss of natural vegetation

M T

Excavation of soil Loss of plants M P Movement of vehicles Nuisance to people and animals N T Noise from construction equipment

Nuisance to people and animals M T

Excavation of land Loss of vegetation M T Movement of heavy vehicles

Public nuisance N T

Protection of workers’ health and safety

Loss in workers’ health M T

Temporary road closures Public nuisance M T

32 This appendix is based on Appendix 15 of ADB RRP: BAN 35242 Oct. 2005

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during construction Post Construction/Testing Phase No H2S in delivered gas Elimination of poisoning risk M to S P Security checking of pipelines

Disturbance to social life and wildlife

N T

Adequate periodic monitoring

Loss to ecology and economy M T

Leakages and line breaks Nuisance to people and animals, and loss to ecology and economy

M to S T

N = negligible, M = moderate, S = severe, T = temporary, P = permanent

Table A10.2 Summary Environmental Management Plan (EMP)

Potential Impacts

Benefit Enhancement /

Mitigation Measures

Management Actions Executive Responsibilities

Pre-construction/Testing Additional

environmental impacts not yet

identified

Additional environmental

investigations during stage of detailed

project preparation

Scoping with detailed environmental and

monitoring plans to be carried out for all

subprojects prior to construction

Afghan Gas

Construction/Testing Safety of local

communities and workers

Ensure safety of local communities and

workers

Safety training for all workers

Afghan Gas

Operation and Maintenance/Post-Test Potential gas

leakage Monitor pipelines for leakage, and prepare evacuation plans in

advance

Monitor during operation

Afghan Gas

Potential sabotage Design pipeline security plan

Install barriers to prevent unauthorized

access to facilities, and perform security

monitoring

Afghan Gas

C. Disclosure, Consultation and Grievances 2. The ADB team consulted with employees from Afghan Gas and the Oil and Gas Exploration Department. Before project construction, it is recommended that public meetings be held in Sheberghan to discuss the benefits of the proposed project. and the

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duration and nature of disruption in the town that will occur during construction of the distribution network.

D. Monitoring and Evaluation 3. The EMP should have both internal and external monitoring. Environmental specialists in the project management unit (PMU) will be responsible for internal monitoring of EMP implementation and should submit quarterly reports to the EA. Afghan Gas should submit semi-annual monitoring reports to ADB. Afghan Gas should hire an independent monitor, with ADB approval, to report semi-annually to ADB on whether sound environmental management practices have been achieved, and to suggest remedial measures if necessary.

Table A10.3 Summary Environmental Monitoring Plan

Environmental Monitoring Tasks

Implementation Responsibility

Implementation Schedule

Pre-Construction Phase Audit bidding documents to ensure EMP is included

Afghan Gas Prior to issue of bid documents

Construction Phase Monitor contractor’s performance to ensure that mitigation measures in EMP have been included

Afghan Gas Continuous throughout construction period

Operation and Maintenance Phase Inspections to include monitoring implementation status of mitigation measures specified in EMP

Afghan Gas As per inspection schedules

D. Costs

4. Table A10.4 shows the estimated cost for the EMP and environmental monitoring.

Table A10.4 Summary of Estimated Costs for EMP and Environmental Monitoring

Item Description Total Cost $ Retention of environmental specialist for PMU

2 person years $50,000

Monitoring activities by EA ¼ time for 8 years $50,000Independent auditing 4 months of consulting + travel $90,000Contingency About 10% $20,000

Total $210,000

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E. Conclusion 5. The project is anticipated to have minimal environmental impacts, which can be mitigated by implementing EMPs. The EAs will need to strengthen their capabilities to implement and monitor EMPs. This need has been designed into the project by requiring environmental specialists in the PMUs and the hiring of an independent monitor.

Appendix 11 52


Appendix 11: Development of Environmental, Health, and Safety Guidelines for the Oil and Gas Sector in Afghanistan and Implementation Framework

Development of Guideline 1. The development of a country specific Environmental, Health, and Safety (EHS) Guideline for the oil and gas sector in Afghanistan would set a country standard and a regional example of good practice. The Guideline would be developed in line with international standards and best practices and would provide the Government of Afghanistan with guidance on how to regulate project developers, financiers, and other decision-makers in order to help avoid, minimize and control EHS impacts during the construction, operation, and decommissioning of a project or a facility.

2. The EHS Guideline would contain information relevant to seismic exploration; exploration and production drilling; development and production activities; transportation activities, including pipelines; and other facilities. Technical environmental guidance would be provided for air emissions, wastewater/effluent discharges, solid and liquid waste management, noise generation, terrestrial impacts and project footprint, and spills. For example, emissions/effluents specifications and benchmarks would be listed, and pollution prevention and control techniques would be identified. Direct and indirect impacts to natural resources in arid environments would also be specified, and mitigation measures would be recommended. Regarding occupational health and safety, the document would highlight issues to be considered such as fire and explosion, air quality, hazardous materials, transportation, well blowouts. Emergency preparedness and response; safety precaution measures would be provided. Community health and safety impacts, such as physical hazards and security, and archeological considerations could also be included.

3. We recommend that a multidisciplinary team composed of international specialists in environmental engineering, geology, natural resources management, health and safety, and community health (with specialization in the oil and gas sector, other specialists could be supplemented as necessary), mirrored by a national team of experts in the oil and gas sector, collaborate to carry out project activities. Activities may include: 1) a two-week initial site visit (e.g., introduction of international and national teams, thorough review of Afghanistan’s current practices and policy, visit of on-site infrastructure); 2) development of draft Guideline by the international team at the contractor’s offices; 3) review period by national team; 5) second two-week site visit to discuss comments and collect further information; 6) integration of comments, development and submission of draft Final Guideline by the international team; 7) national vetting process; 8) Final document preparation and submission by the international team.

Implementation 4. Once the Guideline has been developed, we propose that the international team develop two-documents: 1) an action-oriented implementation plan, which also identifies capacity-building activities for Afghanistan’s environmental and other ministries; and 2) a comprehensive Monitoring and Evaluation program. For these activities the international team will be supplemented by a facilitator, a capacity-building/institutional

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strengthening expert, and possibly a policy expert (with experience in Central Asia). Activities envisaged are the following: 1) a third two-week visit made by the international team to discuss the types of activities that are feasible for inclusion in the above-mentioned documents; 2) development of documents at the contractor’s offices; 3) training and capacity building to take place in Afghanistan; 4) development of a long-term monitoring and evaluation plan by the international team in collaboration with national experts.

Appendix 12 54


Appendix 12: Contract Packages No. Description Contract

Type Procurement Mode

Cost Estimate US$million

1 Sheberghan distribution network and transmission line

Turnkey ICB $20.9

2 Consulting Services Capacity Building at Afghan Gas Capacity Building at Ministry of Mines

• Environment, health and safety

• Price monitoring Network design Network construction supervision

QCBS $2.0 $2.0 $1.0

ICB = International competitive bidding QCBS = Quality and cost based selection