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Somalia’s first licensing round could be a tough sell

The former “failed state” needs to deliver on its promises if the bidding process is to be a success

The launch of a Somalian offshore licensing round at a London roadshow in February did much to showcase both the geological potential of the acreage on offer and the efforts being made by the fragile state's government to lure foreign investors who have been absent for decades.

But oil companies will be wary of making substantial investments in a country that, until recently, was a by-word for political instability. The authorities will also need to convince them that production-sharing agreements (PSAs) on offer will be legally binding.

Seismic survey firm Spectrum, which organised the roadshow in conjunction with the Somali government, is promoting 15 newly offered blocks in both shallow and deep water. Following the launch of the tender protocol on 7 February, the stated deadline for applications is 11 July, with the outcome of bidding process to be decided by 7 November. PSAs would then be signed by December 2019.

The blocks were carved out of the Somali offshore on the basis of 20,000km of 2D seismic data Spectrum obtained in 2016 and a further 20,000km acquired by Russian-backed UK independent Soma Oil and Gas in 2014-15.

According to Spectrum, all three of the country's offshore basins-Obbia in the north, Coriole off central Somalia and Jabu-Lamu Basin in the south-have oil potential in their early cretaceous deposits. Jabu-Lamu's older late Jurassic rocks also offer gas and condensate potential. Spectrum stressed the latter basin's similarity to the geology of Mozambique's Rovuma Basin, eager to draw parallels with a region that has yielded large gas finds.

The company estimates the areas combined could be home to 30bn barrels of unrisked resources.

Before 1991, when the Somali state collapsed into violent unrest, international oil companies (IOCs) were aware of the country's potentially interesting offshore. They drilled more than 60 wells, albeit without a major discovery-Spectrum puts that down to poor data and inaccurate geological modelling.

Competitive terms

The data is now more detailed and Somalia's political situation more stable than it has been over the last quarter of a century. But investors will still need some convincing to plough money into what was, until recently, regarded as a failed state, even if drilling offshore offers some insulation from onshore risks.

With that in mind, the Somali government is at pains to ensure that the licensing round is seen as being both transparent and highly competitive compared to those on offer elsewhere in Africa.
Source: Petroleum Economist

Pedro Van Meurs, a consultant advising on the round, told the meeting the government take is around 54-66pc-intended to be well below those on offer in Mozambique, Tanzania and Kenya. Signature bonuses are set at $2mn for most blocks. Royalties are based on sliding scales, on a percentage adjusted by daily production, plus a percentage based on price. There is no carried interest for a state oil company.

Efforts have also been made to reduce the ability of so-called "briefcase" companies to snap up acreage with the sole intention of selling it later at a profit without developing it. Such "flipping" strategies have slowed African offshore developments in the past.

Qualification criteria require all applicants to have adequate financial resources to carry out the necessary activities. Operators bidding must have experience of drilling in water greater than 500m depth. Non-operators bidding need to show they are financially sound.

The deputy speaker of the Somalian parliament, Abdiweli Sheikh Ibrahim Mudey, addressed the roadshow to provide reassurance that Somalia's constituent states were behind the licensing round. He stressed the significance of a pact on sharing revenues from all the country's resources agreed between the states, the federal government and other bodies in June 2018.

However, the country's parliament has yet to ratify an amendment to Somalia's petroleum law, which must be in place for the PSAs to be signed. Mudey said he expected the amendment to be ratified once parliament, which was in recess, had been reconvened. But neither he nor Somalia's petroleum minister Abdirashid Mohammed Ahmed could provide a firm date by which it would happen-a potential point of concern for bidders.

Background of unrest

Meanwhile, protests by opponents of the Somali government at the London meeting drew attention to the potential for political unrest to undermine the oil and gas sector's development. Several dozen demonstrators outside Claridge's hotel, where the meeting was held, protested against the licensing round, claiming the process would be corrupt. A protestor also interrupted the meeting itself to shout criticism of the country's president Mohamed Abdullahi Farmajo, before being escorted from the room.

Somalia's government is backed by the United Nations and can count on support from an African peacekeeping force. The US also provides military support in the form of air raids against Al-Shabab, the Islamic extremist group that wants to overthrow the Somali government and carries out terror attacks both within the country and against its neighbours.

While Al-Shabab has suffered setbacks, it remains a potent force. The group has carried out several deadly attacks since the start of 2019, including the detonation of a car bomb that killed 11 people in the capital, Mogadishu; and the targeted killing of the head of Dubai's P&O Ports' operation in Puntland, a semi-autonomous region of Somalia.

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