Global Insight Perspective | |
Significance | A proposed new hydrocarbons law could see foreign majors and supermajors return to Somalia and a new NOC launched as the country aims to develop its petroleum sector. |
Implications | Companies could return to the concessions they held before the country descended into civil war in the 1990s. However, there could be problems as some smaller firms have reached agreements to prospect in the autonomous republics, Puntland and Somaliland. |
Outlook | Somalia is regarded as having significant potential of commercial reserves of crude, but the country's poor security situation may dissuade supermajors from resuming operations. |
Somalia's transitional federal government (TFG) is reportedly preparing to allow the foreign oil majors and supermajors that were forced to quit the country when Somalia descended into civil war to return under a proposed new hydrocarbons law. Reuters reports that it has seen a yet-to-be-debated parliamentary bill that would, if approved, allow companies that held concessions before 30 December 1990 to return to those areas. However, the companies would have to sign new production-sharing contracts (PSCs), with different financial terms, exploration periods, and obligations, as well as new block sizes. The news agency quoted the draft law as saying: "A prior grant in the form of a concession entitling the prior contractor to conduct exclusive petroleum operations shall be convertible into a production-sharing agreement".
Over the last 15 years the country has experienced anarchy and was largely run by warlords as the state collapsed. Several major oil companies had interests in Somalia before pulling out when the government fell in 1991. African Energy states that ConocoPhillips and Italy's Eni (under its Agip arm) identified several prospects and drilled three wells, which had oil shows, and ConocoPhillips had identified areas for further drilling. The civil war also saw Amoco (now part of BP) and Chevron declare a force majeure and leave the country. (A force majeure indemnifies a company from lawsuits for not meeting contractual obligations as a result of an event, such as a civil war, that is beyond its control.)
The proposed new hydrocarbons law also nullifies any exploration deals that have been agreed since 1990, which is the part of the bill that is likely to have furthest-reaching implications. Over the last five years, the northern areas of the country that view themselves as autonomous—the Republic of Puntland and the Republic of Somaliland—have received interest from a number of small exploration and production (E&P) firms. In January, for example, Australian explorer Range Resources and Canada's Canmex Minerals Corp. signed PSCs for Blocks 28, 29, 30, and 31 in the Nogal and Dharoor Valleys. However, Reuters reports the draft law as stating: "Any right to conduct petroleum operations in Somalia granted after 30 December 1990 shall terminate and cease to be a binding obligation on the government".
Additionally, last month, the Financial Times (FT) reported that the China National Offshore Oil Corp. (CNOOC) and China International Oil and Gas (CIOG) had signed a PSC with the TFG to prospect for oil in the Mudug area of north-eastern Somalia, which location would appear to fall under the jurisdiction of the authorities in Puntland. It is believed that members of the three parties met in Nairobi, Kenya, on 24 June, when Abdullahi Yusuf Mohamad, the Somali Energy Minister, Chen Zhuobiao, managing director of CNOOC Africa, and Judah Jay, managing director of CIOG, clarified parts of the agreement. However, Somalia's interim Prime Minister Ali Mohamed Gedi denied the FT's report.
NOC to Be launched
If the legislation is approved, it would enable a NOC, called Somalia Petroleum Corp., to be launched. According to recent reports, the state would take a controlling 51% in the corporation, while Indonesia's PT Medco Energy International and Kuwait Energy Co. would earn the remaining 49% by funding all of its operations and carrying its exploration and development costs. However, Somalia's Energy Minister Abdullahi Yusuf Mohamad, currently meeting an expatriate Somali community on a visit to Australia, has denied that any foreign firms will be allowed to own any stake in the new NOC and that the state will own 100%. He said that the Ministry of Oil would publish an official press release on 27 August..
Outlook and Implications
Somalia does not have any proven reserves of crude, but, because of its location between East Africa and the Persian Gulf, there is a belief that the country holds commercial reserves of oil as the geology is analogous to Yemen and Arabian trends. The foreign oil companies would be given one year from when the law is ratified by parliament to sign the new PSCs. Reuters states that the new contracts would see the government would receive 8% of revenue in cash on the first 25,000 barrels per day (b/d) of oil if the price is US$55 or more per barrel. For output of more than 100,000 b/d, it would receive 14% of revenue.
The decision to invite foreign majors and supermajors back to Somalia is a further sign from the TFG that it is keen to develop the country's oil sector and believes that, by asking experienced firms to resume operations, prospecting could begin once again in the near future. Somalia is still classified as a prospective oil province and the foreign oil companies could be attracted by the country's potential. The increasing interest shown in Somalia by smaller E&P firms and China reflects both the country's geological potential and the lack of opportunities elsewhere. Few would consider the country to offer oil prospects comparable to the Persian Gulf, however, the majors may show rather more patience before looking elsewhere .Crucially, foreign oil companies will spend time analysing local security, with Somalia still enduring violence on a daily basis, although the continued conflict in the south of the country should not affect any exploration programmes in the north.