Uzbekistan to start processing Afghan crude as Taliban attempt oil revival

Uzbek oil refiner Saneg has struck a deal to process a first batch of Afghan crude at its 2 million mt/year (40,000 b/d) Fergana refinery, according to a senior participant in Uzbekistan's oil industry close to the matter.

Under the deal, crude is to be delivered from Afghanistan's Hairatan terminal across the Amu Darya River into Uzbekistan using rail cars provided by Saneg, the source has told S&P Global Commodity Insights. The first shipments had already been dispatched, the source said. Negotiations had involved Uzbekistan taking 100,000 metric tons of crude, he said, although the final volume agreed was unclear.

Afghanistan's Taliban government is trying to kickstart upstream production amid chronic fuel shortages.

Negotiations on Uzbekistan processing crude produced in northern Afghanistan have been underway for several months, the source said. The relatively high sulfur content of the crude had been one challenge discussed, he said.

Uzbekistan has long had tense relations with its war-torn southern neighbor. No country has extended formal legal recognition to Afghanistan's Taliban authorities since their overthrow of the previous US-backed administration in 2021. But there have also been signs of a warming as the Taliban makes overtures to countries around the region, notably Russia.

Afghanistan has long had small amounts of oil production in the Amu Darya Basin in the north of the country, but little ability to process the crude, remaining overwhelmingly reliant on fuel from neighbors such Turkmenistan, Iran and more recently Kyrgyzstan – the latter is said by its statistics agency to have supplied nearly 5 million liters to Afghanistan in the first half of 2024.

Russia also supplies oil products to Afghanistan, with Russian companies looking to ramp up supplies as they try to offset European sanctions, according to Russian media.

Afghanistan has been in a long-standing energy crisis, likely worsened by recent fuel supply problems in Iran, according to Saeed Hashemi, an Iranian analyst with Arvin Energy.

"Every day, several tens of millions of liters are smuggled abroad from Iran's borders with government subsidies," Hashemi said, estimating that diesel generators meet around a third of electricity supply in the capital Kabul, with a similar situation in the second-largest city, Kandahar.

Upstream push

In 2011, Afghanistan's ministry of mines held a tender for three northern blocks estimated to hold over 80 million barrels, with China's CNPC awarded a contract for production at the Bazar-Kami and Ak-Darya fields, both discovered in the 1970s, Commodity Insights' records show.

The Taliban have been trying to kickstart production since at least the spring of 2022, according to press reports. In 2023, China's Central Asia Petroleum and Gas Co., or CAPEIC – based in China's western Xinjiang region -- signed a major oil extraction contract with Taliban authorities in Afghanistan, pledging to invest $540 million in crude oil production by 2026.

The Fergana refinery is the only one in Uzbekistan with the technical ability to process the Afghan crude, the industry source said, explaining the Soviet-era facility was designed for a variety of crudes.

The crude will primarily be used to produce diesel for the Uzbek market, the source said, adding exports of fuels back to Afghanistan could be on the cards.

It is believed to be the first deal involving Afghan crude being processed outside the country, though companies from several other countries have been trying to negotiate similar arrangements.

Saneg declined to confirm a deal to process Afghan crude and said it was not currently processing any crude from Afghanistan.

Earlier, a group of companies from Russia's Tatarstan region reached a preliminary agreement to process Afghan crude, Rustam Khabibulin, head of the Russian business delegation in Kabul, revealed in July 2023.

Some Russian refineries were interested in exporting petroleum products back to Afghanistan, potentially easing the country's chronic fuel supply problems, Khabibulin said. However, a number of the countries on Afghanistan's northern border also face fuel supply deficiencies.

Under previous Western-backed Afghan leaderships fuel supply for US and allied military forces was a constant headache, with deadly attacks on supply trucks coming from Pakistan a frequent occurrence.