International oil firms set eyes on Somalia for hydrocarbon development

Dar es Salaam, Tanzania (PANA) - Somalia, slowly recovering from over two decades of anarchy, has continued to face substantial above-ground risks to developing its hydrocarbon sector, including legal uncertainty, political instability and piracy, according to a new study by Business Monitor International (BMI). 

‚ÄúHowever, with upstream firms increasingly eager to capitalise on East Africa’s hydrocarbon potential, if the soon-to-be-undertaken surveys by UK-based Soma Oil and Gas produce favourable results, this may accelerate exploration in Somalia regardless of the ongoing political instability,‚Äù BMI has noted in its analysis of risks related to oil exploration in the Horn of Africa country.

While Somalia’s hydrocarbon development will remain vulnerable to substantial above-ground risks, a recent deal between the government and Soma Oil and Gas increases the chances of an uptick in upstream activity over the coming years.

On 6 Aug., the government announced the signing of an agreement with the recently-created UK-independent firm to conduct seismic surveys in Somalia’s territorial waters and in limited onshore areas.

Although several of the country’s self-proclaimed autonomous or quasi-independent regions have inked deals with international oil companies (IOCs) in the past, BMI pointed out, ‚Äúthis is the first agreement signed by the internationally recognised central government, following more than two decades of civil war.‚Äù

“We see this as an attempt to capitalise on the growing foreign interest in East African hydrocarbon exploration. That said, we continue to see a number of above-ground risks to hydrocarbon exploration in the country,” BMI said, mentioning legal uncertainty and potential for a backslide into political chaos as part of the risks.

“The biggest threat to upstream companies looking to operate in Somalia is the lack of clarity regarding who has the power to grant rights for hydrocarbon development,” the study observed.

Not only does Somalia remain enmeshed in an international dispute with Kenya as to the countries’ shared maritime border, but even within Somalia there remains a high degree of ambiguity, as it remains uncertain which governmental entities have the authority to grant the contracts to IOCs.

Indeed, the Somali constitution gives a high level of autonomy to regional governments, allowing them to enter into contracts with foreign oil companies.

However, a still-to-be adopted petroleum law would mandate that only the central government can distribute natural resources.

The report noted that this uncertain legal environment is only exacerbated by the weakness of the central government.

“Even if the laws governing oil and gas exploration are clarified, Mogadishu currently lacks the power to enforce its mandates,” BMI noted. “Thus it remains unclear whether the international companies would be better off trying to deal with the central government in Mogadishu or other authorities claiming authority in the country, including semi-autonomous Puntland, or Somaliland which has declared itself independent.”

On the possibility of a backslide into chaos, BMI observed that the rivalries between the autonomous and semi-autonomous regions have already created an atmosphere of uncertainty.

“While it is not our core view, we cannot rule out that these disputes will create further political instability,” the report cautioned.

Several decades ago, a number of the major IOCs, including BP, Chevron, ConocoPhillips, Eni and Shell, were awarded licences in the country, though they abandoned exploration as the civil war broke out in 1991.

“While these firms have expressed an interest in restarting exploration, the autonomous regions have already begun to parcel out the blocks to new bidders,” BMI reported.

For example, in February, the self-declared autonomous state of Galmudug signed a deal with PetroQuest Africa for a block which overlaps Shell’s original concession.

While Soma has indicated that it intends to steer clear of any blocks with prior claims on them, the duelling claims of other companies could exacerbate the deep regional divisions, and increase instability in the already fragile country – adding an additional risk for those companies operating in Somalia.

Meanwhile, high levels of violence are likely to keep operational risks high as large chunks of the rural south are still under the control of militant Islamist group Al-Shabaab rather than the government.

In addition, Somalia’s waters remain plagued by piracy, with at least 150 vessels held to ransom since 2005.

“Though we have seen a reduction in this illicit activity since its height, it remains an ongoing problem,” BMI said.


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