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Facing the oil curse

Drilling for oil in a war-torn African country was always going to be a high-risk venture, but the consequences of Range Resource's activities in Puntland, Somalia, could be dire

Oil's curse, the idea that the wealth from finding crude ends up triggering more problems than it's worth, is a theory that has been tested many times on African soil. In Somalia, it could be tested again, soon, and the stakes are high. Range Resources, an Australian firm listed on the London Stock Exchange's (LSE) Alternative Investment Market (Aim), thinks it might discover up to 0.5bn barrels of oil in Puntland, a semi-autonomous region on the Horn of Africa.

When Petroleum Economist visited Somalia recently, as a guest of Range, a rig was on its way to the Nogal block. If oil is found in the quantities Range hopes, the discovery could transform Puntland, an impoverished corner of a war-ravaged country that is on the verge, again, of more famine and political implosion.

"It will look like Dubai," Liban Bogor, one of the company's directors, told Petroleum Economist. He was talking about Bosaso, a port on the Gulf of Aden that provides Puntland with the bulk of its income, through exports to the Middle East of livestock driven into the city by nomads. It takes imagination to see such a first-world metropolis emerging from the Bosaso landscape. Even in Puntland, which has enjoyed relative peace while southern Somalia and the country capital Mogadishu burn, weaponry is omnipresent. Range's executives travel with bodyguards in heavily armed convoy, bumping along Bosaso's roads of rubble. The city's infrastructure is dire. In huts on its fringes live thousands of refugees from southern Somalia and Ethiopia.

Optimistic claims

Understandably, in a deeply impoverished country the prospect of a large oil discovery has excited the region's government. "Gas and 0.5bn barrels of recoverable oil have been discovered so far in sections of the state's 212,000 square km," reads its five-year development plan. That's one of many optimistic claims in the plan – the truth is that no-one will know how much oil, if any, Somalia has until Range and African Oil have drilled their wells. And even if oil is found, extracting it will take time, which is another commodity lacking in a country desperate for some kind of relief.

Range claims Puntland's geology is similar to that in Yemen, where production last year amounted to 390,000 barrels a day. The company doesn't have the expertise or capital to carry out a drilling programme in Puntland, so it farmed out 80% of its concession to African Oil Corporation, a Canadian firm.

Getting a rig onto its prospects in the Nogal and Darin basins, a good 200 km inland, will be difficult enough. But the real problems could start if Range and African Oil were to find oil. When Petroleum Economist asked Puntland's president, Adde Muse Hersi, what he would do with income from oil production, his answer was blunt: "Spend it on security." Somaliland, a region to the west that has declared independence from Mogadishu, already lays claim to portions of Puntland and invaded last year to occupy a region near its capital, Garowe. The close relations of clans in the two regions may prevent a full-blown war for the time being, says Muhamed Muhamed, editor of Garowe Online, a diaspora news site covering Puntland. But if oil is found, that could change.

Meanwhile, central Somalia is descending deeper into the chaos that has afflicted the warlord-dominated south. Piracy is rife off the country's coast and the US, which sees Somalia as the third front in its war on terror, is worried about the rise of Jihadists. Oil could slide Puntland into that abyss, too, especially if any oil wealth is not managed transparently and invested appropriately. At the same time, the Transitional Federal Government (TFG) in Mogadishu, whose grasp on power depends on the presence of the US-backed Ethiopian army in Somalia, also wants its say on who owns any oil that is found in the country it governs in name, if not reality.

That issue came to a head last month when the Puntland parliament in Garowe passed an oil law that proclaimed its ownership of subsoil resources, albeit with the intention to share an unspecified portion of revenues with the rest of Somalia. The TFG immediately rejected the law and Puntland's authority to pass it, saying Somalia's natural resources belonged to Somalia.

For Range, the backing of the Puntland government was a boost. "Momentum on the ground is everything in Africa," Peter Landau, a company director told Petroleum Economist. Get the oil flowing, he argued, and the laws will fall in place.

But Puntland's oil law also effectively endorsed the contract Range signed with Garowe in 2005. That might not be surprising: President Muse told Petroleum Economist that the company had been "helpful" in drawing up the law. (Range says it merely introduced to the government the South African legal firm that drew up the document.) Indeed, although Range now only holds the rights to the two oilfields, originally its contract gave it all of the land in Puntland. It may have relinquished some of that, but Muse said any companies interested in a concession would need to consult Range, first.

That so small a company carries such influence in Puntland appears strange. At the centre of Range's involvement in Puntland is Bogor. As a director and shareholder in Range, his role as an adviser to the president (who is a family relative) explains some of the company's power. He was also one of the original shareholders in Consort, the company that held the concession in Puntland before Range. Sources claim other members of the government, including President Muse, are shareholders in Consort – which will receive a $20m bonus payment if and when Range and its partners drill their fourth well. Range, however, says that neither Bogor nor any government ministers are shareholders in Consort and that its shareholding structure was checked by the London Stock Exchange at the time of Range's Aim listing. (Consort is registered in the Maldives.)

Opaque shareholdings and a lack of governmental transparency would hardly be anomalies in the African oil sector, but the consequences of Range's activities in Somalia could be dire. Find oil and, the president admits, Puntland could be drawn into the devastating conflict that has consumed the rest of Somalia for the past 20 years. Drill a dry hole and dreams of a new Dubai will be even more remote. Either way, Range and its executives are unlikely to be in Somalia for long – Landau hopes a discovery will see the company "cleaned out" by a bigger firm. (An engaging entrepreneur, he has a number of other high-risk business ventures elsewhere needing his attention.) "The Chinese would be the most likely buyers," says one investment banker in London, "because they'll bring their own army." And of Range he adds: "I wouldn't capitalise this company."

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