After decades of civil war, Somalia is working towards building a functioning political system and exploiting its natural resources.
Researchers have hypothesized a total 110 billion barrels of reserves in the country’s holdings, which would place Somalia among the top 10 reserve holders worldwide.
Seismic analysis carried out by UK-based company Soma Oil & Gas, which was funded in 2013 for the purpose of exploration in the eastern African country, revealed a potential of 30 billion barrels of crude oil.
Launching first bidding round
The 2D data was gathered over a total of 50 offshore blocks covering 66,795 square miles.
The country is now launching its very first bidding round after reviewing its Petroleum Law and getting all member states to sign a brand new Petroleum Ownership Management and Revenue Sharing Agreement.
The bill provides guidance on how revenue coming from upstream activities will be shared among communities, while member states will choose independently how to invest their revenue share.
Minister Ahmed speaks to Kallanish Energy
Kallanish Energy met last month with the Minister of Petroleum & Mineral Resources, Abdirashid Mohamed Ahmed, at a roundtable in London to discuss the launch of the auction.
The Petroleum Law was first drafted in 2008; however, it had to be reviewed based on the Federal System introduced in 2012.
The latter was the first government established since the collapse of the Somali Democratic Republic in 1991 – the year of the start of the civil war, which brought a declaration of force majeure for all oil activities.
Force majeure remains in place
In fact, supermajors Royal Dutch Shell and ExxonMobil acquired exclusive E&P rights over five offshore blocks in the 1980s, and last month signed a settlement letter to pay $1.7 million of surface rental fees to the government.
At the moment, force majeure remains in place.
The only other company venturing in the country in the civil war years was Soma, with a “seismic option agreement,” Ahmed said at the meeting.
According to the new law, the three firms won’t be given priority in the bidding round and will have to apply following the same process as all other companies.
Moving to the next level
“The law was not federal, in 2008, and now all this legislative policy framework development was undertaken; it’s the time when we move to the next level where we start negotiations with the companies,” Ahmed added.
The government announced in February the first bidding round, including 15 offshore blocks, with the bid date scheduled for this November. Roughly 20 companies attended a roadshow in London earlier this year, with more expected at the Houston roadshow in October.
None of the blocks are within the area disputed with Kenya, as the two countries are waiting for a decision by the International Court of Justice in the Hague, expected in September.
Offshore blocks offered for security reasons
They have been fighting since 2014 to gain rights over 38,610 square miles believed to contain hydrocarbon deposits.
All blocks on offer are offshore for security reasons, as inland hasn’t been secured yet, an operation that “will take time,” Ahmed said. The ocean is guaranteed to be safe to operate in, according to the government.
“In the last few years there was absolutely no piracy in Somalia at all, and also there are private security companies operating, specialized private security companies which provide maritime security to the future offshore Somali operations,” the minister said.
“Hopefully the companies aren’t worrying so much about the security of Somalia,” he added.
Political risk may hinder development
However, the political risk and the question of whether the potential oil reserves are commercially viable may hinder the development of the Somali oil and gas industry, according to Scott Pegg, Professor at Indiana University Purdue University Indianapolis.
“The revenue sharing agreement looks good and is a good starting point,” he said in an email to Kallanish Energy.
“My fear is that it looks like a strong foundation for oil production in Somalia but, in reality, it is a strong foundation built on a very thin sheet of ice that could crack at almost any time for almost any reason,” he added.
Civil war left country in abject poverty
The two decades of civil war left the country in extreme poverty, depending heavily on the African Union Mission in Somalia (Amisom), a regional peacekeeping mission operated by the African Union with the approval of the United Nations Security Council.
While the agreement appears solid, there are concerns whether authorities and third parties will actually abide by it.
In terms of reserves, “there is a massive disjunction between the rhetoric and the reality of Somali oil production,” Pegg said.
While the country is said to have contained hydrocarbons since the 1950s, no oil has ever been produced, and there are no proven reserves, as numbers previously suggested are from preliminary analysis.
Relying on oil exploitation
“If its reserves were truly that large, surely exploration and production would be much further along than they are,” said Pegg. “The lack of proven reserves and any production will, in combination with the political risk noted above, certainly deter many potential investors.”
Nonetheless, Somalia bills itself as an attractive country to invest in, as it offers favorable conditions to compete with their neighbors, and is located in a strategic point on the Indian Ocean.
The country is relying heavily on the exploitation of oil to kick-start its economy and provide wealth to its people.
“Somalia is open for business,” the oil minister told Kallanish Energy.