How oil could transform Somalia’s development, reduce poverty
Opinion / 5 July 2019, 6:05pm / Abdirashid Mohamed Ahmed
The story of Somalia is being rewritten. The Petroleum Law which was recently passed by Somalia’s Parliament marks a new chapter in our country’s history.
Late last month we were also delighted to sign an agreement with Shell and ExxonMobil settling historic obligations and initiating a roadmap enabling the conversion of concessions into Production Sharing Agreements (‘PSAs’). We are at the beginning of a journey that could be key to sustainable development and poverty reduction, as well as the continued development of stable state and civil institutions.
This landmark new petroleum law, as its name implies, is about oil. It sets out the financial and regulatory framework that enables our Government to finally explore whether reserves of oil and gas exist, as so long suspected, off the Somalian coastline. But, even more importantly, the Law ensures that any oil discovered is the sole property of the Somali people today - and in the future. It will provide the necessary resources to invest in vital infrastructure that is so crucial for our future sustained prosperity.
Protecting our people’s rights of ownership over the country’s most valuable natural resource is unprecedented, not just in Somalia but across the world. The revenue sharing agreement embedded in the Law mandates how future revenues will be shared between the federal government, Somalia’s six constituent member states and their local communities.
It is unique globally with more than a third of any revenues to be distributed among our Member States in a process overseen by our Central Bank and the Revenue Authority/Department. It will be up to our people to elect those representatives whom they believe will invest their monies most effectively and for the long-term benefits of their local communities.
But this is all in the future. Our priority today is to prove the existence of hydrocarbon reserves, and to establish their potential size. Recently completed seismic programmes highlight similar geographical structures to those with proven oil and gas reserves in neighbouring basins located in Seychelles, Madagascar, Kenya, Tanzania and Mozambique.
The size of the geological structures identified offshore, means that these could easily be billion-barrel fields if they contain hydrocarbons. These suggest Somalia could become one of the most significant oil plays in offshore East Africa with as much as 30 billion barrels which, if true, would be truly transformational for our country. However, it is also important to stress that if commercially recoverable oil is discovered, production and therefore revenue sharing will be at least eight years away.
In February, the Somalian government launched the road show of up to 15 offshore blocks covering a total area of around 75,000 square kilometres with bids scheduled by the end of the year. For the avoidance of doubt, no blocks in the area currently subject of a pending judgement by the International Court of Justice will be part of this or future licensing rounds until settlement is reached in the Hague. Somalia has consistently committed to abiding by the decision of the Court.
Perhaps unsurprisingly, there has been significant interest in the blocks currently the subject of bids. Given the scale of the opportunity and the robust processes we have put in place, this is not surprising. Oil companies that prove successful will be required to sign production sharing agreements with the Government that details their environmental responsibilities, requiring them to adopt methods and processes that minimise the impact of their work, but also immediately establish the financial terms of our partnership. The government will also honour any agreements previously in place, and these companies will need to adhere to the new terms of our production sharing agreements.
Not only will the successful bidding companies bear the financial risks of further exploration - and remember just one in seven exploration wells typically finds oil in a new frontier - but they will also pay for the development wells and production facilities to extract, process and export any oil found. The Somali people will benefit from any profits generated from our oil over the longer term.
The Somali National Oil Company, which will be founded shortly to be led by a Somali national, will also hold up to 20% in each contract awarded by the Government. The first stage will be planning and mobilizing for more seismic data and the drilling of exploration wells over 2020 and 2021. Critically the Law requires “the adoption of methods and processes which minimize the impact of petroleum operations on the environment”.
There will be myriad twists and turns as the tale of how we develop a national oil industry unfolds. There will be successes and setbacks, unexpected challenges, detractors and supporters - and we must be ready for these. But it is up to us to determine how the final chapter concludes. As the African Development Bank said, “the passing of the Law is a critical stage in the development of Somalia’s resources industry, which will be an important engine for economic growth over the longer term.” Our country has a once-in-a-lifetime opportunity for a happy ending - our government must ensure it is not wasted.
* Abdirashid Mohamed Ahmed is the Minister of Petroleum & Mineral Resources of The Federal Republic of Somalia.