Afghan mining minister Waheedullah Shahrani and China National Petroleum Corporation (CNPC) president Lu Gong Xun signed the deal in Kabul on Wednesday.
It will develop three oil fields in the relatively peaceful north of the country, along the Amu Darya river on Afghanistan’s border with its central Asian neighbours.
Afghanistan will take 70 per cent of the net profits and CNPC will pay 15 per cent corporation tax and hundreds of jobs are expected to be created.
CNPC outbid four companies for the project.
Extraction is not expected to start until late next year. The deposits to be exploited are estimated to contain about 87 million barrels of oil.
The amount is relatively small globally but significantly profitable for Afghanistan,
Six oil deposits have been discovered in Afghanistan, which also has unexploited reserves of copper, iron and other minerals. One oil deposit, also in the north, is estimated to be worth 1.8 billion barrels, while there are others in Herat province in the west, Helmand in the south and Paktia in the south-east.
Lu Gong Xun, who said that CNPC will build a refinery, promised further investment if more reserves are exploited.
China, the world’s second-largest economy, is investing heavily in oil-rich countries, including in Africa where it builds roads, schools, football stadiums and transport hubs.
Afghanistan’s poor infrastructure, wrecked by decades of war, is both a problem and an opportunity for Chinese investors, although the widespread instability and corruption do not have any apparent mitigating factors.
Three years ago the China Metallurgical Construction Corporation signed a 2.6-billion-euro deal to develop the Aynak copper mine in the eastern Logar province.
China moves in economically as the US is set to move out militarily, posing a possible challenge to President Barack Obama's strategy of countering Beijing's influence in Asia.