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Somalia's revenue law adds impetus to exploration drive

Efforts to attract investment to a 15-block offshore licensing round are gathering momentum

Parliamentary approval for a new petroleum law, which includes a revenue sharing agreement with the country's constituent states, should make Somalia's current offshore licensing round run smoother. But the focus on getting that legislation through has led to slippage in the timetable for the bidding process.

An agreement between Somalia's federal government and the country's constituent states was regarded as crucial to avoid the licensing round procedure becoming bogged down in wrangling over the allocation of potential revenues from any future hydrocarbons discoveries between the central government and the states in whose waters they lie.

The petroleum ownership management and revenue sharing agreement, passed by the federal parliament on 20 May, details the revenue splits for various forms of income and differing rates for onshore and offshore income (see Table 1). For example, the central government will receive 55pc of the offshore tax take, the oil producing state will get 25pc, the local area of production 10pc and non-oil producing states 10pc. The establishment of a national investment fund is also planned. According to the petroleum ministry, the semi-autonomous region of Puntland is party to the agreement.

Somalia has been seeking to cement a new federal political structure, as politicians seek to overcome historical mistrust between various clan-based factions and move towards the country's first "one person, one vote" elections since 1969, which are scheduled for 2020 or 2021. In recent years, presidents have been elected by parliamentary votes, with parliamentarians themselves being elected by elders of the country's influential clans.

The hydrocarbons agreement is seen as an important part of the political reform process, given the potentially huge impact of any oil and gas income on this impoverished country. Somalia is still healing its wounds after decades of civil war, terrorism and periods of famine.

A new deal

Efforts have also been made to resolve outstanding disputes with existing stakeholders in Somalia's offshore acreage to pave the way for good future relations with the industry. The petroleum minister, Abdirashid Mohamed Ahmed, confirmed to journalists at a briefing in London on 28 June that the ministry had signed an agreement with operator Shell and its partner ExxonMobil over historic obligations, such as surface rentals, relating to offshore blocks previously placed under force majeure during the civil war.

Under the agreement, the Shell-Exxon joint venture will pay Somalia some $1.7mn in accumulated surface rental payments covering 1990-2018 and is working on a roadmap to enable previously agreed concessions to be converted into production sharing agreements (PSAs) under the new Petroleum Law. None of this acreage is part of the current licensing process.

Source: Petroleum Economist

Soma Oil and Gas could bid in the licensing round on the same terms as other firms, if it wants to participate, Ahmed says. The UK-based company provided Somalia with seismic surveys on some 60,000km² of offshore acreage in 2014, in a deal which apparently gave it priority over others if it wished to explore in certain areas.

On the other hand, "the federal government honours the legacy agreements and contracts of Soma [which] has a seismic option agreement with the federal government of Somalia", according to the petroleum ministry.

Soma's activities in Somalia were subject to a probe into alleged corruption and bribery by the UK's serious fraud office (SFO). This was dropped in 2016, on the basis that a successful prosecution was unlikely, although the SFO said it had "reasonable grounds" to suspect that offences had been committed.

Timetable extension

Somalia initially said the deadline for pre-qualification applications for the licensing round would be 11 July, with winning bids for the 15 blocks in the licensing round, which cover some 75,000 km², to be announced shortly after 7 November. That deadline looks certain to be put back, with a new timetable expected to be announced shortly.

Only one international roadshow has been held to promote the round so far-in London, in March-and the next is not due until one scheduled for Houston in late September or early October. Ahmed says the timetable has slipped because the ministry had been focused on getting the petroleum law passed. Spectrum Geo, the firm marketing the 2D seismic data for the licensing blocks, had shown data to around 20 companies so far, says Ahmed. The production sharing model for the blocks is due to be detailed in coming months.

A blocks map issued when the licensing round was first announced caused controversy when several blocks in border waters whose ownership is disputed by Kenya were shown as belonging to Somalia-although none of this acreage was included in the licensing round itself. Somalia has since clarified that it accepts that the area is disputed and marked it accordingly. The International Court of Justice in the Hague is to hold a hearing on the border dispute in early September, in which both countries will present their sides of the argument.

Table 1: Allocations under Somalia's Petroleum Revenue Sharing Agreement        
         
Details Federal Government Oil producing states Local area of oil production Non-oil producing states
         
Investment fund TBD by Minister of Finance      
         
Offshore 55pc 25pc 10pc 10pc
         
Onshore  30pc 30pc 20pc 20pc
         
Royalty 40pc 40pc 10pc 10pc
         
Signing bonus 40pc 60pc    
         
Surface rent 30pc 50pc 20pc  
         
License fee 50pc 50pc    
         
Production bonus 30pc 50pc 10pc 10pc
         
Corporate income tax 100pc      
         
Export Tax 60pc 40pc    
         
Capital gains 50pc 30pc 20pc  
         
Seismic data 50pc 50pc    
         
Capacity building 50pc 50pc    
         
Local community development   30pc 70pc  
         
Source: Petroleum ministry, Somalia        
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