By Jessica Donati

KABUL, July 8 (Reuters) - One-eyed Rateb Popal's debut as an Afghan businessman was not promising: he was caught smuggling heroin and locked up in a New York federal prison for almost a decade.

Popal had better luck once back in Afghanistan, where he emerged from obscurity to make millions in U.S. army convoy security following the 2001 removal of the Islamist Taliban. He went on to win rights to the first major oil and gas project.

The Amu Darya joint venture with Chinese energy firm CNPC is the only major foreign investment in Afghanistan's estimated trillion dollars worth of natural resources that stands a real chance of succeeding and providing an alternative to income from aid.

Other huge investments in iron and copper face collapse.

And yet Amu Darya, in Afghanistan's far north along the river of the same name, is beset by stumbling blocks.

Though the site's Soviet-built wells are pumping oil and selling it to a nearby refinery, disputes over budgeting between CNPC and Popal's company, Watan Oil and Gas,have halted drilling and exploration.

"If CNPC fails in Afghanistan, it will severely hamper future foreign investment in the Afghan hydrocarbon sector," said Matthew Napiltonia, a former director of the project.

If the dispute is resolved, the 25-year partnership could contribute $250 million a year to the national budget, according to a World Bank report, create hundreds of jobs and relieve the burden of expensive fuel imports.

Popal's past, including allegations that his security firm bribed the Taliban for safe passage, fails to dent optimism that he and his Watan group of companies can make the project work.

Many hope others will be lured to the near-untouched basins that, according to the U.S. Geological Survey, may hold 1.6 billion barrels of crude, one of the largest discoveries in decades, and 15.6 billion cubic feet of natural gas.

Over several interviews with Reuters, Popal explained he fell into smuggling after leaving Afghanistan to seek treatment for a wartime injury at the start of the 1979 Soviet invasion.

Caused by the early detonation of a bomb intended for Soviet soldiers, it cost him an eye, his left arm and most of the fingers on his right hand.

"Jail did me a lot of good and bad," Popal said at his company office. "I was very religious beforehand. I studied a lot."

Popal cast a striking figure alongside Taliban officials in the 1990s when he dabbled in fuel imports, with an eye patch to match his long black beard and turban. The patch has now been replaced by a glass eye and his grey beard is trimmed short.

He denies his security firm ever paid off the Taliban: "On one side, the Taliban were threatening us and on the other side, the U.S. was claiming that we were paying them off."

ALLEGIANCES, RED TAPE AND GRAFT

Amu Darya's difficulties are similar to those faced by businessmen battling personal allegiances, red tape and graft.

Popal complains that Chinese subcontractors owned by CNPC are charging too much for drilling and exploration. One source put the figure in dispute at around $105 million.

A senior Pentagon official helping the oil project as part of the U.S. strategy to help Afghanistan develop its own sources of income said both Popal and the Chinese inflated costs.

"You don't know what the first market price is. So everyone is going to say it's 10 times more than what it is. It's the regulator's job to say no, it actually isn't," he said, on condition of anonymity.

The Ministry of Mines and Petroleum has sided with Popal and asked CNPC to re-tender the contracts or face being kicked off the project.

"If they don't take action, we can impose penalties or cancel licences. The government needs revenue," said a senior ministry official, who also spoke anonymously.

Former employees, however, allege the ministry adopted its position because of Popal's ties to the president and officials.

"CNPC never violated any Afghan laws or regulations," said Napiltonia. "It was a calculated assault by Afghan partner Watan Oil and Gas against CNPC to obtain lucrative oilfield subcontracts."

Popal denies this: "I did my own audit on cost in Pakistan and other countries, China. Based on those companies' costs, I thought the value of the contract awarded here was too high."

CNPC told Reuters it was unaware of any contested issues at Amu Darya.

But a Chinese industry official said Afghanistan was of low strategic importance. Probes into graft by former executives, the official said, had made CNPC "more pragmatic" in assessing overseas investments.

A dozen employees approached by Reuters declined to speak on the record as they were owed several months' wages.

Undaunted by the deadlock at Amu Darya, Popal is charging ahead with his next project.

Deftly bringing up a presentation for a $1.2 billion refinery on his laptop, his eyes lit up as he talked about plans for expansion.

"It will be an integrated refinery, one that can produce army grade jet fuel," he said. "It's going to be very profitable." (additional reporting by Aizhu Chen in Beijing; Editing by Maria Golovnina and Ron Popeski)

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