Upstream oil companies eager to capitalise on Horn of Africa potentials

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

The report, released Friday by the Business Monitor International (BMI), said despite the abundant risks, ‚Äúif Soma’s surveys return favourable results, we could see a moderate uptick in investment into the country.

“This is particularly the case as exploration accelerates in neighbouring Kenya, and Uganda nears commercial production,” BMI observed in its October 2013 monthly market intelligence, trend analysis and forecasts for the oil and gas industry.

In BMI’s view, “Somalia continues to face substantial above-ground risks to developing its hydrocarbon sector, including legal uncertainty, political instability, and piracy.”

However, with upstream firms increasingly eager to capitalise on East Africa’s hydrocarbon potential, BMI noted that if the surveys to be undertaken by UK-based Soma Oil and Gas produce favourable results, ‚Äúthis may accelerate exploration in Somalia regardless of the ongoing political instability‚Äù.

On 6 August, the Federal Government of Somalia announced that it had signed an agreement with the recently-created UK independent firm to conduct seismic surveys in Somalia’s territorial waters and in limited onshore areas.

This was the first agreement signed by the internationally-recognized central government, following more than two decades of civil war.

“We see this as an attempt to capitalize on the growing foreign interest in East African hydrocarbon exploration,” BMI said, pointing to legal uncertainty as the biggest threat to upstream companies looking to operate in Somalia.

According to the report, there is a lack of clarity regarding who has the power to grant rights for hydrocarbon development in the Horn of Africa country.

Not only does Somalia remain in an international dispute with Kenya as to the countries’ shared maritime border, but even within Somalia it remains uncertain which governmental entities have the authority to grant the contracts to international oil companies.

“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.

“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,” BMI noted.

In addition, rivalries between the autonomous and semi-autonomous regions have already created an atmosphere of uncertainty, while it cannot be ruled out that these disputes would create further political instability.

Furthermore, high levels of violence in Somalia are likely to keep operational risks high.

Large chunks of the rural south are still under the control of militant Islamist group Al-Shabaab rather than the government.

‚ÄúInvestors’ attention is turning toward the Horn of Africa as the next regional hotspot,‚Äù BMI said, but suggesting that large oil companies would not invest substantial resources into Somalia in the short term, given a still uncertain payoff and the high level of political risk.

“Soma could be an important first step by the Somali government in opening up the Horn of Africa to hydrocarbons development,” the report added.


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