In Focus: Oil and Gas in Somalia

Somalia Basins

Somalia has an intriguing history both politically and geologically, but the country has largely been overlooked. Widely regarded as hugely prospective, it has never had the opportunity to prove it. That could change.

Somalia Basins

MapStand Platform (Basins layer in partnership with Geonostics)

Exploration began in the 1950s with AGIP, BP/Shell, Mobil and Sinclair all searching the Horn of Africa for giant structures similar to those found in the Arabian peninsula at that time. Many wells were drilled onshore and most came up dry, but a number of shows were reported too. It’s fair to say the definition of shows and commercial discoveries has certainly changed since those times.

This activity continued through the 60s, 70s and 80s with other big names joining the fray, including Conoco, Elf, Texaco, Amoco and Chevron, all taking up positions in the country.

But in 1991, the music stopped abruptly, with the country collapsing into a state of anarchy after a military coup. Whilst many of those companies have since merged and changed names, to this day they still stake a claim to their pre-war licences under a clause of force majeure.

Following the civil war, Somalia broke up into numerous factions and states. There are many political bodies operating in the country, but the four main ones are listed below:

Federal Government of Somalia

The Federal Government of Somalia (FGS) is the only internationally recognised body operating within the country. Although it officially administers the nation, in reality, aside from a few other areas, this control reaches no further than the borders of Mogadishu. It does however have some pro-government support from Puntland and other various states. The government is reliant on foreign aid to function, with the United States being one of the largest donors.

Somalia Blocks

Blocks from MapStand Platform

Under the new petroleum law passed in January 2020, the FGS holds full ownership of petroleum and mineral resources within the country's pre-1991 borders. The new act dissolves all licences awarded by regional entities after 1991. The body still honours pre-1991 contracts under force-majeure and has recently offered

acreage in adjacent areas within the country's latest offshore licensing round.

Al Shabaab

Al Shabaab is one of the militant islamist groups operating within the countries power vacuum. It controls vast swathes of land in the south-east of the country and governs via a strict form of Sharia law. The Federal state is still unable to provide for its population and as a result the group maintains a stranglehold on the country. It administers key public services and recruits disenfranchised individuals, providing an income for many of the populace under its control.

Somalia Alshabab Attacks 2016-2020

Although the FGS has made progress tackling this insurgency with help from the UN, the group is still a very present disruptor onshore. The UN backed AMISOM programme (African Union Mission in Somalia), is expected to fully withdraw troops by the end of 2020, raising concerns of a potential regression in the security situation.

Puntland

Puntland is a stable, autonomous region with an un-elected governing body. It is located towards the north east of the country and 'has' relatively good relations with the federal government.

Puntland

The region's ministry has awarded petroleum licences in the past and is still an active body. In 2005, authorities granted two blocks to Range Resources. The blocks covered both Puntland and disputed areas of Somaliland. The company and its partners drilled two exploration wells in 2012, Shabeel-1 and North Shabeel-1, the former encountered strong oil shows over a gross section of 490ft, with a possible net pay between 39ft and 66ft. The partners relinquished both blocks in 2015 and the region no longer administers any active licences.

Puntland announced in 2015 that it was preparing to launch a licensing round offering up to 25 offshore areas. Those plans dissipated as the region grew closer to the FGS.

Tensions have started to rise, with Puntland branding Somalia's new 2020 petroleum law as “grossly unconstitutional” over concerns that it violates the constitutional rights of the region.

Somaliland

Somaliland is a self-proclaimed independent state with a democratically elected government. Whilst stable and fully functioning, the country is not internationally recognised by the UN. Or more specifically, the United States, over concerns that recognition could further destabilise the region. (US-listed oil companies Chevron

and ConocoPhillips still claim force majeure on licences covering Somaliland and Puntland.)

Somaliland Blocks

The country has granted a number of onshore licences to companies including Ansan Wikfs, DNO, RakGas and Genel. DNO has since relinquished its position, but the latter two companies are still active in the region with exploration plans in place.

It remains to be seen if these companies will still press ahead after the internationally recognised FGS officially invalidated these licences with the new petroleum law.

The presence of oil companies in the region has accelerated a territorial dispute with neighbouring Puntland and a number of armed clashes have been reported.

Somalia’s first licensing round

Somalia recently announced the country’s first licensing round after passing its new petroleum bill in February 2020. The bill also finalised fiscal terms, established the Somalia Petroleum Authority and Somali National Oil Company (SONOC). The country is offering seven offshore blocks towards the South East of the country. The round will open on 4th of August, and close on 12th March 2021. Over 20,000 km of 2D seismic acquired between 2014 and 2016 can be acquired from TGS.

Somalia First Licensing Round

Preliminary interpretation of this data has revealed large tilted fault blocks, fold belts and reefal buildups. Satellite imagery has even identified offshore oil slicks in the area, potentially setting the country apart from its gas prone East African peers.

Promising is the word on everyone's lips. Fiscally and prospectively (discovered resources), it's probably fair to say Somalia used to rank as the most unattractive countries in the world. The country now fully understands the need to be fiscally attractive at this early stage of jump starting its petroleum industry. Attractive terms will be a good first step, particularly within today's intensely competitive licencing environment.

But what about the piracy?

Somalia had a reputation for piracy. Today that is just a reputation. The peak of the Somali piracy crisis was between 2007 and 2012, with attacks occurring almost exclusively off the north of the country within the busy shipping route of the Gulf of Aden.

A strong international response has curbed those numbers to the point where no attacks have been recorded in the vicinity of Somalia for two years. The blocks on offer are in an area that has very little history of piracy.

Somalia Pirate Attacks

Could a theoretical oil industry be a tempting target? Possibly, that depends on the long term security situation at the time of exploration activity (3 yrs) and development (~5-7 yrs).

The Kenyan maritime border dispute

The sovereignty of a large offshore area is in dispute between the governments of Kenya and Somalia. With Somalia arguing that the maritime boundary should be drawn along the same direction of its land border and Kenya arguing it should extend parallel to the line of Latitude.

Kenya Somalia Boarder Dispute

Whilst this dispute has no direct impact on acreage offered in Somalia’s first licencing round, it does have potential destabilising ramifications for the region. In response, Kenya has been supporting the semi-autonomous region of Jubbaland (adjacent to Kenya's border) in an attempt to undermine the authority of the FGS. A number of armed clashes have occurred recently between the latter two entities.

For Kenya, the disputed area encapsulates a number of actively licenced blocks and could significantly reduce the country's offshore territory.

For Somalia, the federal government has very limited control over its own country. The areas it can successfully offer in upcoming licensing rounds are similarly limited. The FGS is keen to increase its territorial control, believing it has a chance in the short term with an international resolution to the maritime dispute. Both sides are unwilling to back down. In 2014 Somalia brought the case against Kenya to the International Court of Justice at The Hague, which was set to be heard earlier this year. The coronavirus pandemic has since delayed the hearing.

Will there be any interest in the offshore round?

Macroeconomic trends certainly aren’t helpful and the response could be less than spectacular. On the face of it, the country has done a great job setting up a competitive round. Fiscal terms are supposedly attractive and the geology is reportedly very enticing too, with large leads on offer.

Deepwater projects have recently been attractive and are regarded as one of the most carbon-friendly methods of reserve replacement (not a phrase I would utter in public), but require significant upfront capital and technical expertise. The presence of a major oil company or an experienced NOC will be required at some stage. Many majors are already present in the country and they still have not lifted force majeure.

Will deepwater still be competitive in 5-7 years time? Costs have come down via technology and standardisation, but a good chunk of that has been in relation to an excess capacity and intense competition within the supply chain over the last 6 years. This is not a sustainable situation and the recent chapter 11 bankruptcy of Diamond Offshore is a stark reminder. As attrition of assets takes hold, and bankruptcies and consolidation occurs, the current supply/demand dynamic could flip. Costs could rise, requiring large discoveries to justify development. For counter-cyclical investment opportunities, licensing rounds are probably not near term enough.

Indirectly security is a concern. Whilst exploration and development work would occur far offshore, tensions are building internationally due to the Kenyan maritime border dispute, and internally too. The withdrawal of AMISOM may also lead to a deterioration of the situation. The long term stability of the country and its governmental structures is under question.

For Somalia, this licensing round is a potential lifeline. The country is in dire need of revenue to rebuild. The fiscal terms could be too generous, especially if only small volumes are found. Ultimately it’s the chicken and egg debate. Political governance and wealth redistribution are key points to mention. The country has a history of personalised politics, with power and wealth concentrated along a narrow political elite. If potential economic growth from oil is not compounded with government and political restructuring, internal tensions may rise.

The question for oil companies is very simple. Do the fiscals and the geology outweigh the above ground risks?