Somalia opens the upstream [NGW Magazine]

Somalia’s government underscored its hope of attracting oil and gas companies to invest in the country by approving a petroleum law on February 8. But according to analysts, long-standing security and political risks pose a threat to successful development.

President Mohamed Abdullahi Farmajo signed the Petroleum Bill into law nine months after the lower house of parliament approved it and just over a month after the senate had done the same. In a statement announcing the enactment of the law, Farmajo said the development was a “landmark moment” in the development of Somalia’s natural resources, which, he added, will be “transformational” for the country’s development.

“The petroleum law,” he said, “demonstrates the capacity of the Somalian people to unite in an historic effort to work together to build an equitable, prosperous and peaceful nation. In supporting this law, our democratic institutions have renewed their commitment to work for all Somalis and advance the cause of continued reconstruction.”

The minister of petroleum and mineral resources Abdirashid Mohamed Ahmed said the opportunities for the international exploration and development majors were “enormous” and that Somalia had the potential to become “one of the most significant hydrocarbon plays in offshore east Africa. The legislative process has completed to open up this strategic opportunity. We now much look forward to moving to agreeing production sharing agreements with our international partners.”

Key objectives of the law include confirmation of the sovereign rights of Somalia to explore, develop, produce, use and manage its petroleum resources while encouraging foreign investment into the sector. It also seeks to establish the Somalia Petroleum Authority as the regulator; and the Somali National Oil Company. The law would “ensure fair treatment of specified persons holding rights pursuant to petroleum grants made by the Somali Democratic Republic on or before December 30, 1990, and agreements made by the federal government of Somalia,” it said.

The Horn of Africa country (pop.: 14.7mn) is sparsely explored but hydrocarbons are believed to exist onshore and off its Indian Ocean coast. Some of the world’s dominant oil companies, including the majors US ExxonMobil and Anglo-Dutch Shell, hold exploration licences issued in the 1990s. Some estimates suggest that the country has up to 100bn barrels of oil waiting to be discovered.

To showcase its hydrocarbon exploration opportunities, Somalia has been on an international roadshow which was launched at a conference in London in February 2019. At the conference Farmajo’s government launched its first licensing round for 15 offshore blocks covering about 19,400 km², but it has deferred it for ten months, pending the approval of supporting legislation.

Seismic data covering 20,185 km shot in 2015 by Spectrum Geo, an Oslo-headquartered company, indicate high potential for hydrocarbon exploration in offshore Somalia. “Offshore Somalia remains one of the last truly frontier passive margins in the world,” Spectrum says on its website. “Only two exploration wells have been drilled offshore along the 1,000 km-long margin and both are in the shallow near-shore area in less than 100 metres water depth.”

A gas find in Somalia would fit with the success of a number of oil companies on and offshore in the country’s east African neighbours’ territories. Tullow Oil discovered oil in landlocked Uganda in 2006 and with its partners, French major Total and China National Offshore Oil Company, it expects first oil production in 2022. Equinor, Shell and Medco International (formerly Ophir) are among others working to develop finds totaling 57 trillion ft³ onshore Tanzania or offshore in deep water since 2014.

However, the largest discovery in east Africa’s section of the Indian Ocean has so far been in Mozambique which has 180 trillion ft³ of gas. Total is leading one partnership that is in the initial stages of building a $20bn, 12.88mn metric tons/yr LNG export facility in the country after the final investment decision was made in June 2019. Another group led by ExxonMobil is billed to sanction a $30bn LNG project in Mozambique around June this year, the date having slipped.  

But there is no rush into new LNG projects: it looks like it will be a buyer’s market for years. For example, ExxonMobil refused to be rushed into accepting the Papua New Guinea government’s terms for the island’s LNG plant’s expansion.

In theory, the new law could help advance Somalia’s hydrocarbon ambitions; but on the ground, analysts caution, perennial security and political risks could frustrate progress. Farmajo is leading a federal government whose authority is undermined by Islamist terror groups al-Shabab and the Islamic State in Somalia (ISIS).

East Africa analyst at specialist global risk consultancy Control Risks Patricia Rodrigues told NGW that the legislation is a positive development for the business environment in Somalia as it is intended to provide more clarity for investors in the sector and reinvigorate international interest in the country.

“However, international companies will be concerned not only about the security challenges but also on the ability of the government to enforce the legislation,” she said.

“The federal government in Mogadishu and regional state governments are engaged in disputes over the sharing of resources and powers between the different levels of government, and the potential injection of oil-related revenues will likely exacerbate these issues. For example, the regional government of Puntland in January rejected the law, stating that it had not been consulted.”

Security problems mean that exploration in Somalia is very limited although international companies already possessing licences have paid their renewal fees, although their operations are dormant.

Somalia’s chances of realising its oil and gas potential, she added, will heavily depend on the government’s ability to provide a secure environment and contractual stability for operators.

“It will be challenging for the government to allay these genuine concerns about security, especially as the Islamist militant group al-Shabab remains resilient and active in south-central regions and in the capital, Mogadishu,” she said.

“Although there has been progress made in establishing the state security forces, the police and army are undermined by divisions between clans and sub-clans. The government also remains heavily dependent on international support to equip and train the security forces as well as combat the threat posed by al-Shabab. The government has limited means to ease security concerns.”

Somalia has been unstable since armed opposition groups overthrew Mohamed Said Bare’s government in 1991. Soon after the coup and the country’s descent into a civil war, an area named Somaliland in the north declared itself independent. Seven years later Puntland, in the northeast, declared itself an autonomous state. A third region, Jubaland is also autonomous. The absence of a central governing structure has provided fertile ground for the growth in al-Shabab and Isis militancy as well as inter-clan violence; but US-backed security forces are fighting to curb their influence.

As Somalis continue to fight among themselves, they are also engaged in a regional fight against neighbouring Kenya over a maritime zone thought to be gas-rich. Hearings into the case were supposed to be held at the International Court of Justice (ICJ) in September last year but were moved to June this year at Kenya’s insistence.

Somalia, which took the matter to the ICJ in August 2014 wants their border to be drawn on a line slanting southeastward as an extension of the direction of flow of the land border. Kenya wants the boundary to run on a parallel line of latitude due east. Four oil blocks lie in the disputed area.

Kenya’s government has not yet publicly responded to the enactment of the law and its possible implications on their wrangle, but a local newspaper, The East African which has tended to reflect the government’s position on the border case, reported February 18 that the legislation gives a new dimension to the border dispute. The paper claimed that the law gave Somalia’s government powers to potentially sell oil blocks that are in the disputed area. It said Kenyan diplomatic officials, speaking off the record, were watching to see if, indeed, any of the blocks in the disputed area will be affected by the expected public auctions.

In Somalia itself, as Control Risks’ Rodrigues said, the new law has deepened tensions between the states. Puntland state president Said Abdullahi Deni said it was enacted without the due consultations with the states. It was therefore unconstitutional.

Soon after Farmajo signed the law into effect, Deni issued a statement warning all “international companies interested in investing in onshore and offshore oil reserves in Somalia to steer away from any agreement based on the new petroleum law signed by the Somali president.” The oil companies have other options for their upstream investment cash though and might decide in this case and in this point in the cycle that the risk is greater than the possible reward.