AFGHAN GAS ENTERPRISE – ASSESSMENT REPORT

ASSESSMENT OF AFGHAN GAS ENTERPRISE WITH FINDINGS AND

RECOMMENDATIONS

NOVEMBER 14, 2016

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Table of Contents

Acronyms and Abbreviations ...................................................................................................... 2

Executive Summary ...................................................................................................................... 3

Introduction – Scope of the Document........................................................................................ 4

Organizational Structure and Staffing ....................................................................................... 5

Current State of Afghan Gas Enterprise .................................................................................... 8

Findings and Recommendations ................................................................................................ 11

a. Unicon’s Assessment Findings of 2014 ............................................................................. 11

b. Findings of this Assessment............................................................................................... 12

c. Immediate Recommendations ............................................................................................ 13

d. Long-term Recommendations ............................................................................................ 15

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Acronyms and Abbreviations

ADB Asian Development Bank

AGE Afghan Gas Enterprise

CNG Compressed Natural Gas

GDP General Directorate for Petroleum

GSPA Gas Sales Purchase Agreement

HR Human Resource

HSE Health and Safety Environment

IMC Inter-ministerial Commission

IPP Independent Power Plant

MCM Thousand Cubic Meters

MoF Ministry of Finance

MoMP Ministry of Mines and Petroleum

MOU Memorandum of Understanding

NFPP Northern Fertilizer and Power Plant

SOE State Owned Enterprise

TFBSO Task Force for Business and Stability Operations

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Executive Summary

The Afghan Gas Enterprise (AGE) is a state-owned enterprise responsible for production and

overseeing of natural gas operations. The AGE reports to the State-Owned Enterprise (SOE)

Management Directorate at the Ministry of Mines and Petroleum (MoMP). The AGE also has an

institutional relationship with the Ministry of Finance for the approval of their business plan. The

AGE employees and contractors aggregates to 950.

The AGE as an entity has been in decline for the last couple of decades. The gas production is

barely 5% of the highest production levels. The reserves are also declining because of lack of

exploration activity and investment in the upstream sector. The AGE currently provides majority

of the produced natural gas to the Northern Fertilizer Power Plant (NFPP); also known as

Kodiburq, at a highly subsidized rates. Other customers include, the City of Sheberghan, Aqcha

District, and Compressed Natural Gas (CNG) Station – all of them combined consume less than

5% of the gas quantity supplied to NFPP. In addition, the Afghan Government has signed

multiple Memorandum of Understandings (MoUs) for providing gas to potential Independent

Power Plants (IPPs).

This assessment report identifies the shortcomings in AGE’s ability to provide commercial

quality gas on commercial terms for the life of a contract. The AGE can increase the production

through infrastructure investments in upstream and midstream component of operations.

Additionally, the report also provides recommendations for improving the operations of AGE.

The immediate recommendations from report identifies the development of Natural Gas Policy,

capacity building plan for AGE, developing gas registry, and technical assistance support crucial

for the development. In the long-run, the corporatization is necessary for the turning AGE into a

profitable entity.

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Introduction – Scope of the Document

Afghan Gas Enterprise (AGE) was established in 1967 to implement and oversee natural gas

operations in northern Afghanistan. In the 1970s, it is reported that upwards of 40% of the

national income was attributed of AGE revenue. The Sheberghan gas fields in northern

Afghanistan were employed for the production and export of natural gas by the Soviets. The

Sheberghan gas fields were developed by the Soviets in collaboration with the Northern

Hydrocarbon Exploration Directorate and AGE.

The Soviet withdrawal in 1998 resulted in the closure of the export route and many producing

wells were plugged. The remaining producing wells were allocated to the Northern Fertilizer and

Power Plant (NFPP), the commercial sector (including bakeries, a textile factory, food

processing plant, etc.), and domestic consumers in Sheberghan. The production from the

remaining wells continue declining due to lack of investment in the upstream and midstream

operations. In the recent years, the donor agencies have tried investing into the upstream and

midstream divisions to rescue to the declining production.

The AGE has received assistance from the Asian Development Bank (ADB), United States

Department of Defense’s Task Force for Business and Stability Operations (TFBSO), and

USAID in increasing the production of natural gas from the Sheberghan field. The ADB

assistance was aimed at increasing the gas production from Jarkoduq and Yatimtaq field by

performing well rehabilitation on numerous wells. The TFBSO provided infrastructure support

by procuring Compression, Dehydration, Sweetening, Transmission, and Metering equipment for

AGE. The TFBSO also rehabilitated old pipeline between Sheberghan and Mazar-i-Sharif which

transports gas to NFPP. Lastly, USAID assisted in drilling two new wells in Juma and Bashikurd

field. Apart from infrastructure assistance, the World Bank Group has provided technical

assistance through consultancy services project for the reform of the AGE.

The scope of this assessment report is to provide findings and recommendations as related to

technical assistance and advisory work for AGE and not focusing on operations. It also assess the

AGE ability to provide commercial quality gas on commercial terms for the life of the contract.

The AGE rapid assessment report will guide decisions to further USAID support and

involvement in the gas sector.

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Organizational Structure and Staffing

The AGE organizational structure enables tight control with few senior managers but overall

responsibility for day-to-day operations rests with the President of AGE. The AGE has

institutional relationship with the MoMP and MoF by reporting to the SOE Management

Directorate. The SOE Directorate within MoMP and MoF have the responsibility of reviewing

business plan and financial statements for the AGE. The AGE also works closely with MoMP

and General Directorate for Petroleum in conducting operations.

The AGE has 950 employees and contractors and employee profile consists of an aging group of

senior employees with little general management qualifications, but overall the ratio of formal

qualifications and industry-specific expertise is extremely low.

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Figure 1- Afghan Gas Enterprise Organization Structure

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Figure 2 - Department and Divisions of Afghan Gas Enterprise

Department Divisions Employees Contractors Total Total

Director 1 1

General Manager of Office 5 5 10

Planning Manager 8 4 12

General Controlling Manager 3 1 4

Kabul Office Delegate 3 2 5

Head Accountant 2 1 3

General Finance and Accounting Management 10 3 13

General Assets Management 12 13 25

Revenue Management 15 1 16

Balance Sheet/Accounts Department 2 1 3

Clearance Office 3 1 4

Deputy for Administration 1 1 2

Human Resource Management 13 3 16

Internal Services Management 5 22 27

General Procurement Manager 4 2 6

Building and Maintenance Management 5 32 37

Clearance Manager 6 1 7

Deputy Technical 3 2 5

Executive Technical Manager 3 2 5

Officer of Geology and Exploration of Gas Wells 7 1 8

General Geophysicists 5 7 12

Information and Communication Technology 7 5 12

General Manager for Water and Electrify Provision 8 51 59

Gas Pipeline Control Management 8 46 54

Wells Maintanence Office 7 47 54

Manager for Safety Environmental Protection 1 0 1

Officer of Technical 10 88 98

Vehicle Repair Workshop 2 20 22

Khoja Gogerdak Technical Complex Officer 5 0 5

Officer for Extraction in KG 19 42 61

Manager for Gas Sweetening Plant 11 14 25

Manager for Pressure Compressor in KG 2 11 13

Manager for Steam Production 2 9 11

Automatic Instrument Control 2 9 11

Equipment Maintenance 3 5 8

Laboratory 4 5 9

Officer for Yatimtaq Gas Extraction Unit 5 16 21

Officer for Technical Complex of Jarkoduq 5 5 10

Officer for Condensate Gas Extraction 25 31 56

Manager for Freezer Compressor 4 13 17

Gas Sweetening Plant 14 10 24

Manager for Steam Production 5 12 17

Automatic Instrument Control 6 2 8

Manager for Anti-corrosion of Condensate Park 3 12 15

Manager for Condensate Cleaning 4 1 5

Gas Recovery Office 3 6 9

Laboratory 8 1 9

Equipment Maintenance 2 13 15

Compressor Control Office 2 6 8

Manager for Gas Sale 12 23 35

Manager of Mazar Gas Sale Unit 15 12 27

Manager of Aqcha Gas Sale Unit 3 4 7

Manager for KG Gas Sale Unit 1 2 3

Total 324 626 950 950

Finance and Administrative 98 93 191

Technical 226 533 759950

Jarkoduq Technical Department

Sales and Marketing Department

Total

32

64

95

72

No. of Employees and Contractors

Technical Department

Administration Department

Khoja Gogerdaq (KG) Technical Department

Office of the General Director

Finance and Accounting Department

330

164

193

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Current State of Afghan Gas Enterprise

The AGE supplies gas to NFPP, CNG Station, Aqcha District, and to the City of Sheberghan.

The Afghan Government has also committed to providing natural gas to potential investors for

the IPP projects.

The NFPP currently receives 340 MCM/day of gas, up from 280 MCM earlier this year. As a

state-owned enterprise, it currently pays only $34/MCM. The Inter-Ministerial Commission

(IMC) recently approved a plan to increase the price paid by NFPP by 17%/year.

In spite of the currently heavily subsidized rate, the NFPP barely turns a profit. The fertilizer

factory is over 50 years old, inefficient and over-staffed. Although NFPP has expressed a desire

to receive more gas when it becomes available, it is unlikely that NFPP’s current equipment will

be able to use much additional gas and the factory is unapt to be able to afford to pay for gas

within 3 years when prices exceed $50/MCM.

The City of Sheberghan receives approximately 10 MCM/day from sour gas wells at Gerquduq.

and Shakarak. The precise amount is unknown, given that most of it is unmetered and not paid

for. In spite of the health risks, the sour gas is unprocessed. The sweet gas wells at Gerquduq are

dedicated separately to supplying the pipeline to NFPP and the proposed IPP.

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Gas Commitments Off-Take Location Gas Volume

(MCM/Day)

Contract Req

Gas

Specifications?

Contract Price

($/MCM)

NFPP Mazar-i-Sharif 400 No $ 34.00

City of Sheberghan Sheberghan 9.3 No $ -

Aqcha District Aqcha City, Jowzjan 3.3 No $ -

Khoja Dokoh District Khoja Dokoh City, Jowzjan 0 No $ -

Afghan Gas Housing Sheberghan City 2.5 No $ -

CNG Station

Sheberghan

Sheberghan 1 No $ 150.00

Ghazanfar IPP Mazar-i-Sharif (NFPP) 350 Yes $ 100.00

Bayat IPP Yatimtaq (SE of Amine

plant)

400 Yes $

Jade Glass Mazar-i-Sharif Industrial

Park

10 Yes $

Total

1,176

Amine Plant Capacity

Capacity 960 MCM/day at 1,500 ppm H2S and 2.86% CO2

Figure 3 - Current and Potential Gas Commitment

Afghan Gas Enterprise Operations and Management Limitations:

Afghan Gas are currently producing wells that were drilled and completed 30-40 years

ago to the old, now refurbished, gas pipeline in Shebergan. These wells flow sweet gas at

very low pressures.

There is no optimized production plan to maximize gas recovery by carefully flowing

different wells at different rates as a function of their position in the reservoir, fluid

content, and flowing or bottom-hole pressure.

There is no documented history of volumes of gas, water, and other liquids produced,

much less test results or BHPs at various time intervals.

Afghan Gas has no capacity to conduct subsurface studies, perform reservoir, production

or drilling engineering.

Afghan Gas has no modern HSE culture in place at the wellhead.

There is a lack of H2S safety equipment, monitoring/warning systems, and training to

deal with accidental emission emergencies.

Afghan Gas will soon be asked to complete/hook up/produce a new, high pressure, and

sour gas well. Without sufficient proper equipment and training, there is a significant risk

of fatalities from H2S poisoning.

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Afghan Gas Enterprise Potential Infrastructure Opportunity:

The AGE is currently operating gas fields, gathering and transporting gas to end users. AGE can

increase the production by 150% if the installed amine plant is made operational. AGE currently

lacks the capacity to run the plant and it has wells that are capable of producing sour gas.

According to one estimate, the investment required to make amine plant operational is listed

below:

• Turnkey OEM - $5M

• Private Security - $3M

• Duration – 12-18 months

The mentioned investment will help AGE in increasing gas production to 960 MCM/day. The

additional gas can be sold to the IPP Project in Mazar-e-Sharif or Sheberghan.

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Findings and Recommendations

a. Unicon’s Assessment Findings of 2014

Unicon Ltd conducted an assessment of AGE through a World Bank funded project “Improving

the Business Environment: Reform of the AGE” in 2014. The key findings from the report are

listed below:

• Lack of investment:

The Uncion report identified lack of investment as a major problem with AGE. There has

been no investment made into the operations or business systems of Afghan Gas in recent

times. The lack of investment has resulted in negatively affecting the production. It also

negatively affected the gas processing facilities, pipeline assets, and other components.

• Insecure revenue:

The AGE lacks diversity in their customer base and it relies heavily on the NFPP – itself

an SOE, with a history of defaulting on payments. The reliance on a single major

customer results in insecure revenues. Other customer includes the households with over

400 million AFS in unpaid bills.

• Existing gas reserves close to depletion:

The existing gas reserves used by Afghan Gas may be close to depletion and no new

exploration wells are planned to increase the existing reserves.

• Lack of access to finance:

Without limited liability, Afghan Gas cannot effectively use assets as collateral for

financial support. It also submits almost all of its proceeds from business activity to the

MoF.

• Inability to develop the market:

Due to lack of finance and lack of investment in people and business processes, Afghan

Gas has been unable to develop new markets for gas.

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• Lack of skills:

There is a lack of skills at various levels, particularly of modern utility management

skills.

• Overstaffing:

There is evidence of overstaffing where employee numbers have not adjusted to the

decline in business operations.

• Ministry involvement:

The MoMP is involved in many details of the operations and Afghan Gas management

are not authorized to take decision that are usually the responsibility of executive

management in an efficient commercial business.

• Steady decline:

A combination of the above-mentioned issues has led to a state of steady decline at

Afghan Gas.

b. Findings of this Assessment

This assessment report is aimed at providing guidance for future potential assistance from

donors. Apart from potential opportunities in the hard infrastructure, there are opportunities in

the policy, capacity building, technical assistance, and system and processes development areas.

The MoMP or AGE does not have any Natural Gas Policy that will provide direction. Similarly,

the MoMP and AGE does not have any technical assistance from the industry experts who can

introduce modern management practices and develop processes and systems for improving the

effectiveness of operations. Lastly, the MoMP and AGE lacks any capacity building program

and policy for training existing AGE staff.

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c. Immediate Recommendations

Developing Gas Policy

In the absence of a Natural Gas Policy, the MoMP and AGE lacks guidance in developing the

natural gas resources and the hydrocarbon sector. Natural Gas Policy will assist in guiding the

MoMP and AGE towards sustainable development and utilization of the natural gas resources.

Similarly, it will assist the government in maximizing the benefits generated through the

development of the resources for current and future generations.

The Natural Gas Policy should be aimed at providing a framework for the utilization of gas for

the highest and best use. The policy should be directed towards placing high value on the follow:

(a) effective and efficient resource management, (b) cost control, (c) revenue optimization and

management, (d) optimal resource allocation, (e) the development, management and preservation

of financial and social capital, (f) local capacity building and enhanced training, (g) education

and involvement of the people of Afghanistan in the natural gas industry and the industries

sustained by the natural gas industry, (h) the injection of local content into the natural gas

system, (i) sustainability initiatives that include education and public awareness programs, (j)

preservation of the environment, and (k) safeguarding of the health and safety of the citizenry

and those employed in the natural gas industry.

In addition, the MoMP and AGE needs to develop gas pricing model and standard Gas Sales

Purchase Agreements (GSPAs) for different type of consumers. Currently, the gas pricing is not

based on any model and it is heavily subsidized for the NFPP – the largest consumer of locally

produced natural gas. The gas price has to incorporate the upstream and midstream costs of

natural gas operations for the sustainable development of the sector. The upstream cost includes

the exploration and development cost of the new prospective resources which is critical for

replacing existing reserves with new reserves. The Inter-minister Commission (IMC) recently

introduced a new pricing range of $170 – 210/MCM for new customers but it has not been

implemented yet.

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Afghan Gas Enterprise Capacity Building Plan

The AGE does not have a capacity building plan that will ensure improvement in individuals and

the groups’ performance in different settings. The AGE staff has been part of different trainings

program through different donors but it lacks holistic strategy towards human capital

development. In order to function, the AGE needs to develop a strategy for human resource

development for the short, medium and long-term. The strategy, at minimum, should consist of

on-job mentoring, targeted short-term trainings, and scholarships.

On-Job Mentoring:

The main focus of mentoring is teaching and improving specific skills required in day-to-day

operations. Over the last couple of years, the AGE has been part of multiple donor funded

projects related to rehabilitation and drilling of wells, installation of amine plant and

compressors, and rehabilitation of gas pipeline. These projects helped AGE with providing on-

job training to some of AGE staff but it still lacks coherent policy and plan to keep track of

trained staff and monitor their development.

Targeted Short-Term Training:

Targeted Short-Term Training is for quick, specific, in-depth courses intended for individuals

who have strong practical or theoretical backgrounds in a particular area. For example: for the

gas pipeline rehabilitation project, AGE welders were sent to Lincoln Electric for high-pressure

welding training. The AGE leadership needs to ensure that the staff keeps receiving training

Technical Assistance

The AGE leadership requires technical assistance from industry experts to sustain and improve

existing operations. The current leadership of AGE consists of soviet era engineers with no

experience in modern management and technology. The AGE will be soon tasked with the

requirement of providing commercial quality gas on commercial terms for the life of a

commercial contract and with the existing staff and resources, it is highly unlikely to complete

the task. The existing commitment of providing natural gas to NFPP cannot be considered a

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proper commercial contract because it does not include any ramification for the poor quality or

supply of gas. The technical assistance will also help the MoMP in making well-informed

decisions regarding the AGE and gas sector.

Gas Registry

The AGE requires a registry for the current and future gas commitments. The Afghan

Government has signed multiple MoU’s with potential investors for providing gas to the IPPs.

With a well-developed Gas Registry System, the MoMP and AGE can effectively manage the

gas supply by keeping track of different requirements for each contract or commitment. It will

also enable the MoMP and AGE in projecting the gas supply, demand, and reserve replacement.

The registry should be maintained by the MoMP because it assists them in policymaking and

enable them well-informed decisions.

d. Long-term Recommendations

Corporatization

Corporatization is the process of transforming state assets, government agencies and state entities

into corporations. It refers to a restructuring of public entities into legal entities with a

shareholding in order to facilitate the introduction of commercial business management

techniques. But it is important to have commercial and legal reforms before corporatization

benefits can be realized.

Benefits of Corporatization:

a. Introducing sound corporate governance: The corporatization of AGE will result in

clearly defined roles for the leadership, staff, and the government. It will also introduce

greater transparency and accountability for the activities.

b. Introducing modern financial management and accounting practices: The corporatization

of AGE will result in a transparency gas pricing mechanism. It will also introduce greater

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transparency in the overall business of AGE. Similarly, new projects undertaken by AGE

will also come under greater scrutiny from the management.

c. Customer orientation: Currently, AGE does not have any incentive or formal contract that

ensures minimum service obligations. With corporatization, the AGE will develop formal

statement of service and techniques for encouraging and facilitating bill payments.

d. Data Management: The introduction of required disclosure will assist in generating data

about the production and sales of the entity. The disclosed data will assist in evaluating

the performances against the set benchmarks.

In summary, the corporatization will assist AGE in adopting modern business practices and

accountability. Without corporatization, AGE will continue facing decline in gas production and

reserves. Through corporatization, AGE can reinvest the proceeds into upstream and midstream

sector, eventually resulting in greater production and greater profits.