Somali regulator plots course through political quagmire
The establishment of the Somali Petroleum Authority and launch of a licensing round may be undermined if the replacement of the ousted prime minister is not seen as legitimate
Somalia has passed several key milestones on the long journey to establish a hydrocarbons industry. But maintaining legitimacy of the process in a fragmented political environment will be crucial if the country has any chance of securing necessary investment in a hyper-competitive global environment for the exploration dollar.
Emerging from decades of civil war, Somalia has established public institutions with some legitimacy and peace was holding firmly enough for the country to credibly launch its first licensing round in early August. But, with oil riches on the table and the prime minister ousted by a vote of no confidence in late July, these fledgling institutions are in for a stern test.
Hassan Ali Khaire, prime minister since 2017, was formally removed by President Mohamed Abdullahi Farmaajo after he lost a parliamentary vote, with 170 of 178 MPs expressing no confidence.
The official reason, articulated by the parliament’s speaker, was Khaire’s failure to pave the way towards fully democratic elections. A source tells Petroleum Economist that it had more to do with him preparing for a run at the presidency. Either way, it leaves the country’s political situation uncertain. Elections planned for November 2020 will now be pushed back into 2021, Somalia’s electoral commission has confirmed. Even then, the nature of these elections is subject to negotiation, and they are likely to prove controversial.
“Delivery and the mandate of any activities related to oil is up to the ministry and Somali Petroleum Authority” Hussein, SPA
According to the constitution, the president must propose a replacement prime minister to parliament, which would then hold a confidence vote to endorse the appointment. The president has one month from removing a prime minister to propose another, but as the September issue of Petroleum Economist went to press, there was no sign that an appointment was imminent.
The Somali government’s structure is based on sharing power between four major clans and a fifth less prominent one. The president and prime minister must be from different clans and the speaker must come from a third. It is a delicate balance and the chance of a misstep is real.
Where this leaves the licensing round and hydrocarbons industry is an open question. Any long-term decisions or awards made in the absence of an endorsed prime minister and parliamentary confirmation would be controversial.
Nonetheless, Ibrahim Ali Hussein, who was appointed the first chairman and CEO and of the Somali Petroleum Authority (SPA) when it was established at the end of July, says the development of the oil industry is not dependent on the next prime minister.
It is “not very important, in a sense”, he tells Petroleum Economist. “The prime minister is in charge of all the government institutions, including the ministry and SPA, but the role is leadership, that is it. Delivery and the mandate of any activities related to oil is up to the ministry and SPA.”
The removal of the prime minister “will not affect the ability of government institutions to carry out their duties”, he adds. “The government institutions remained working after the prime minister was gone, and we are hoping to have a new prime minister very soon. Nothing will change.”
The appointment of Hussein was not a surprise. He has been the senior economic adviser to the ministry, where he developed the regulatory and commercial framework for the oil and gas industry, since November 2014. The Petroleum Law, passed in February, provides for the SPA to regulate the development of the industry.
The makeup of the SPA board, set out in this legislation, is designed to balance regional interests. Each of the member states nominate one member to the board, and the remaining two come from the federal government. “This structure is based on the ownership, management and revenue-sharing agreement between the federal government and the member states. It was agreed that the SPA and the Somali National Oil Company would be inclusive,” says Hussein.
“The composition of the board is… absolutely fair. States’ governments have procedures for how they nominate. We do not impose anyone on them. So long as they follow the criteria and the requirements—it is absolutely, entirely, up to them,” he says. “All the member states… have access to the ocean and exploitation starts off in these states simultaneously. It is fair. It is inclusive. It is good for everyone.”
Another central component of preparations is a revenue-sharing agreement. Crucially, it seeks to balance the interests of oil-producing states, the federal government and other non-resource-rich states. But it is also perhaps the most contentious issue and the most likely to be the cause of later disagreement.
The SPA board has yet to sit, but it has plenty to discuss. The main short-term objective is to ensure a successful licensing round. “In the next year, one of the key objectives is to ensure that the first offshore contract is awarded,” says Hussein. “Also, that drilling starts next year. The members of the board have not yet had a meeting—so very soon we will meet to develop a plan for the next three years.”
With the institution-building complete, “what follows are the activities, such as the licensing round, negotiations with the oil companies and negotiations with the prior holders, those who hold the legacy contracts,” he continues. “We will be planning activities according to the timeframe that we set in our strategic plan.”
Somalia reached an agreement with a Shell-ExxonMobil joint venture in February that covers future exploration of historic offshore oil and gas blocks. The agreement enables concessions held by the joint venture to be converted into a new agreement.
The joint venture made a $1.7mn payment to Somalia last October as retrospective rent for five blocks it was awarded three decades ago under former president Mohamed Siad Barre; the blocks were never accessed due to the vicious civil conflicts that erupted following Barre’s overthrow in 1991. The payment was distributed according to the revenue-sharing agreement.
“Somalia is a frontier country, but it offers great potential and prospects” Hussein, SPA
The geologically promising blocks are either in deepwater or ultra-deepwater, supported by seismic data. In 2014, the government divided up the entire country (onshore and offshore, up to the 200 nautical mile exclusive economic zone boundary) into 25,000km² licence blocks. It originally planned licensing rounds for 15 blocks, but this was scaled back to seven.
While there are no producing fields—nor were there before the 1991 civil war—offshore exploration data acquired between 2012 and 2016 has reportedly attracted the attention of several industry players.
“Interest is absolutely enormous,” Hussein says of the response to the virtual roadshows in May. “For the first, 180 people attended from different oil companies and investors. And for the second virtual meeting, 260 attended. It was a live event and the interactions, questions and clarifications absolutely showed a great deal of interest.”
It is undeniably a tough environment for licensing rounds, as many delays and cancellations around the world this year attest. “Even though there is Covid-19, even though there is a global economic downturn and there are effects on oil and gas sector, we are still hoping that many oil and gas companies will participate. The list of oil and gas companies that viewed our data is absolutely enormous. And the list of those communicating with us is absolutely great.”
The licensing round is set to close in March 2021, allowing for the ongoing disruption to the world economy. “Somalia is a frontier country but it offers great potential and prospects,” says Hussein. “We have been trying to attract investors, oil companies, to come into our country and start exploration. We have geological potential, very attractive commercial terms and a law that protects investors. We are looking forward to seeing investors flow into our country.”
This article first appeared in print in the September issue of Petroleum Economist.