Political Instability Prevents Somalian Oil from Being Developed

By Asad Cabdullahi Mataan

Somalia’s upstream oil and gas industry will benefit from greater investor confidence and undergo subsequent growth in the years to come, if the Somalian government provides the political stability, security, and infrastructure required for large-scale upstream development, according to an analyst with research and consulting firm GlobalData.

John Sisa, lead upstream analyst for GlobalData, says that, after emerging from two decades of civil war and establishing a central government, Hassan Sheikh Mohamoud, president of the Federal Government of Somalia (FGS), now has an eye on the promise of petro-revenues and another on establishing authority over the regional governments.

However, while one of the first actions taken by the FGS was to declare the illegality of all oil and gas contracts signed by the regional governments, Sisa believes that the potential growth of Somalia’s oil and gas industry depends highly on a cooperative definition of the Somali Petroleum Law between both sides.

“A degree of contract sanctity will be viewed positively by the industry with respect to active contract holders,” he said, “but a working relationship between the federal and regional governments is crucial for this. Recently, the Somaliland government granted consent to Sterling Energy to acquire a 40% interest in the production sharing agreement (PSA) covering Block SL6 and part of Blocks SL7 and SL10 from Petrosoma and Jacka Resources. This transaction’s approval will be a test of the sovereignty of the FGS’s new federal constitution, since the FGS was not consulted over this.”

Currently, Genel Energy holds interests in two PSAs covering five blocks in Somaliland, while Africa Oil holds exploration interests in two PSAs for two blocks in Puntland. The central government plans to sign at least 30 production-sharing contracts by the end of 2014, which will replace these and all other existing contracts.

“Based on the Somali draft PSA, the central government will collect a share of revenues between 55% and 60%, if at least 50 million barrels of crude oil recoverable reserves are discovered,” Sisa said. “This will equate to a substantial return for the government. However, Somalia’s governmental authority remains fragile, and existing local clan militias, Al-Shaabab Islamists and pirates could interfere or attempt to assert control over hydrocarbon resources. This would result in increased uncertainty, higher risk and delays to exploration in the region.”

Sisa believes that a successful resolution of the pressing issues between the FGS and Somaliland governments will help to increase political stability and security, and therefore encourage further investment in the region’s oil and gas exploration industry – and that only once this is achieved will upstream development be able to begin.

Source: GlobalData