Pakistan Struggles to Make Good on a Golden Opportunity in Balochistan

6 MINS READAug 8, 2019 | 09:00 GMT
This Landsat photograph from 1972 shows the Pakistani-Iranian border.

This Landsat photograph from 1972 shows the Pakistani-Iranian border. Landsat photos provide information for map-making, land use studies, pollution monitoring and mineral prospecting. Pakistan is struggling to exploit the minerals that lie beneath its soil.

(SSPL/Getty Images)

Abundant minerals lay buried beneath Pakistan's ground. So why is the country having such a tough time exploiting them?...

In a remote and arid corner of southwestern Pakistan, Islamabad has found itself embroiled in a difficult battle: a multibillion-dollar dispute with a global mining company over one of the world's richest untapped deposits of copper and gold. In July, the World Bank's International Centre for Settlement of Investment Disputes (ICSID) ordered Pakistan to pay $5.9 billion in damages to the Tethyan Copper Co., a joint venture between Canada's Barrick Gold Corp. and Chile's Antofagasta PLC. The ruling stems from a 2012 case that Tethyan lodged at the ICSID against Islamabad for failing to issue a license to mine gold and copper at the Reko Diq site.

The case draws attention to the rich resources of Balochistan, Pakistan's rugged southwestern frontier in which Reko Diq is located, as well as the tug of war between domestic Pakistani law and international arbitration in resolving investor disputes. But above all, the Reko Diq affair shines a light on Pakistan's numerous underground resources and its broader failure to exploit them — something that will continue to haunt the country if it is to fulfill Prime Minister Imran Khan's goal of rapidly ramping up foreign investment.

The Big Picture

Pakistan's Balochistan province plays a vital role in the China-Pakistan Economic Corridor because of its location on the Arabian Sea. It's also known for its resource riches that include an abundance of gold and copper deposits. But a longstanding dispute between the government and a mining company point to the need for reforms, without which mining's contribution to Pakistan's economy won't exceed 3 percent.

A Strategically Significant Frontier 

Pakistan possesses large deposits of gold, copper, chromite, bauxite, iron ore, rubies, emeralds, topaz, mineral salt and coal, many of which are — like Reko Diq — located in Balochistan, Pakistan's largest province. Accounting for nearly 40 percent of the country's landmass, Balochistan's 347,000-square-kilometer area (134,000 square miles) makes it equal in size to Germany. Its strategically located coastline faces vital shipping lanes in the Arabian Sea, including traffic destined for the Strait of Hormuz. As a result, Balochistan is the site of a variety of projects as part of the multibillion-dollar China-Pakistan Economic Corridor, which aims to create a direct overland route linking western China and the Arabian Sea through Balochistan's port of Gwadar. At the same time, however, Balochistan is also home to an insurgent movement that seeks independence from Pakistan on cultural and economic grounds; indeed, Chinese investment in Balochistan has exacerbated long-standing separatist grievances of foreign exploitation in the province. 

The mine itself is located in Chagai, Pakistan's largest and westernmost district. According to Tethyan, Reko Diq contains 2.2 billion metric tons of mineable ore that could yield 200,000 metric tons of copper and 250,000 troy ounces of gold annually for over half a century. To extract the precious metals, the company must shovel, crush and grind the ore into a fine powder before converting it into a slurry concentrate for transport through a 682-kilometer underground pipeline to Gwadar. At the port, the company plans to dry the concentrate before loading it onto ships for smelting abroad.

Pakistan Misses a Golden Opportunity 

But for all of its lucrative potential — $353 million annually at current gold and copper rates — the development of Reko Diq has stagnated because of the long-running legal battle that culminated in last month's $5.9 billion fine. A key element of the dispute centers on the validity of a decades-old pact called the Chagai Hills Exploration Joint Venture Agreement (CHEJVA). Signed in 1993 between the Balochistan Development Authority and BHP, the Australian firm that initially offered its capital and technical expertise to explore Reko Diq, CHEJVA later became the subject of a case at the Balochistan High Court. There, the petitioner argued that the agreement granted unfair advantages to BHP in the form of bigger blocks with more time for exploration than permitted under the law governing mining in the province. The Balochistan High Court ruled against the plea in 2006, declaring that the CHEJVA was valid.

This map showing the location of the Reko Diq mine within the rest of Pakistan.

In the meantime, Balochistan's provincial government begged to differ with the local high court. First, the government terminated the exploration agreement in 2009 and then, two years later, it refused to grant a mining license to BHP's successor, Tethyan. But because the company had already invested $220 million for exploration, it lodged cases at the ICSID and the International Chamber of Commerce in 2012, invoking international arbitration by circumventing the Supreme Court of Pakistan, which claimed that it — and not the ICSID — had jurisdiction over the case. Ultimately, the Supreme Court of Pakistan overturned the Balochistan High Court's verdict on appeal in 2013, ruling that the CHEJVA had been void from the beginning because of its violations of Pakistani law. Accordingly, the Supreme Court also ruled that Tethyan had no investor rights, including that of international arbitration, under the bilateral investment treaty between Pakistan and Australia (where Tethyan is incorporated). The ICSID, however, claimed jurisdiction in the case, ruling in favor of Tethyan in March 2017 before finally announcing last month the total fine, which includes a $4 billion penalty and $1.9 billion in interest charges.

Turning Promise Into Reality

The future of the mine will depend on how Tethyan and Pakistan choose to proceed. The mining company has offered to discuss a negotiated settlement with Islamabad — a gesture the government has welcomed — but it remains unclear whether the company will subsequently maintain its involvement in Reko Diq. Other mining companies from China and Saudi Arabia have expressed interest in the project, while the country's politically powerful military has noted it could help manage the project through its construction firm, the Frontier Works Organization.

The case of Reko Diq points to the fundamental problem in Pakistan's mining sector: the potential offered by the country's abundance of resources and the reality of its inability to efficiently exploit these minerals.

More broadly, the case of Reko Diq points to the fundamental problem in Pakistan's mining sector: the potential offered by the country's abundance of resources and the reality of its inability to efficiently exploit these minerals. If Pakistan wants to successfully exploit its mineral resources, it must attract overseas firms. But as the case of Reko Diq demonstrates, foreign investment requires effective investor dispute mechanisms — to say nothing of roads and other infrastructure to transport the resources from their often remote locations.

Khan, whose top domestic challenge is tackling the structural constraints that are hindering the economy, has ordered the formation of a committee to investigate the Reko Diq debacle and learn lessons for the future. What's more, the Planning Ministry has listed seven reform areas for mining pertaining to regulation, resource mapping, infrastructure, upgrading technology, access to finance and skills development. Pakistan's best-laid plans notwithstanding, the disagreement with Tethyan proves that developments taking place above ground will always affect the riches that lie in the earth below. And unless Islamabad can find a way to finally remove the obstacles to business, the Reko Diq affair appears to be one that it is likely to repeat.

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