Hiiraan Online

by H.E. Abdirizak Omar Mohamed
Friday, September 20, 2013

The East African Energy Forum has indicated that it is opposed to the Seismic Option Agreement (“SOA”) between the Federal Government of Somalia (the “Government”) and Soma Oil & Gas (“Soma”).  In its commentary, the EAEF critiqued the transaction on the grounds described below.  The Minister of National Resources (“MNR”) welcomes the interest of the EAEF in supporting responsible resource development in Somalia.  In order to demonstrate that the SOA is an example of such responsible development, the MNR responds to the EAEF comments below.

Ø  EAEF Comment: The SOA is inconsistent with Extractive Industries Transparency Initiative (“EITI”) to which the Government has committed itself.

 MNR Reply: On the contrary, EITI principles are expressly incorporated into the SOA, with both the Government and Soma stating that they will comply with EITI.  The EITI Principles require that “EITI member countries commit to transparency in company reporting of revenues paid and government reporting of receipts.”  There have been no payments made to the Government by Soma under the SOA.  Following the completion of Soma’s seismic survey in 2014 or 2015, it is possible that Soma may apply for a Production Sharing Agreement over prospective areas identified in the survey.  The Petroleum Law 2008 makes it an obligation of the Government to publish any such Production Sharing Agreement and any payments made pursuant to it.

Ø  EAEF Comment: Soma lacks the expertise or the capacity to conduct the seismic activity and will need to subcontract the seismic activity; seismic contractors should be offered this deal instead.

Moreover, if a seismic company was to be contracted directly by the Government as EAEF suggests, the Government would need to pay for this work (diverting financial resources from more urgent needs), or ask the seismic contractor to do so and then permit the seismic contractor to control the marketing of the seismic and collect the revenues from such marketing until it has recovered a multiple of its costs.  The Government may yet consider retaining a seismic contractor for such a ‘multi-client survey’ within Somalia; in the meantime, the SOA with Soma is highly attractive to the Government, combining a large seismic survey at no cost to the Government, together with an attractive investment contract by Soma on areas that it may select for a Production Sharing Agreement. 

Ø  EAEF Comment: The Government has abandoned its stated position that it will not award contracts until after natural resources provisions of the constitution are settled and it begins discussions with the regions.

MNR Reply: The SOA involves the performance of a seismic survey only, followed by possible Production Sharing Agreements in 2014 or 2015.  Therefore, no ‘contracts’ involving a grant of petroleum development rights will happen for some time, during which constitutional provisions will be developed.  Moreover, the area where Soma may conduct the survey is outside of any existing region, so conflicts with regions are avoided in any case.

Ø  EAEF Comment: The Government should not be entering into resource deals when reconciliation and security should be its focus.

 MNR Reply:  The Government is actively pursuing its reconciliation and security agenda.  The Government possesses the capability to do so while also pursuing a policy of creating economic activity and developing of Somalia’s resources.  The development of resources involves a long period from the commencement of exploration to the production of any oil & gas which may be discovered; this could easily take seven to ten years or more.  The first step that is invariably part of such a development is to gather seismic information.  This will precede the drilling of a well by a number of years.  Therefore, it is entirely reasonable to begin the gathering of seismic information at this time.  Moreover, the conduct of seismic activity demonstrates that the security situation in Somalia is not as dire as some oil companies believe it to be; this should prove to be a further incentive to promote development.

Ø  EAEF Comment: There is no petroleum legal regime in Somalia to govern operational and environmental standards.

  MNR Reply: The Somalia Provisional Constitution provides that existing laws in Somalia continue to apply.  The Transitional Federal Parliament enacted a Petroleum Law in 2008.  It is a modern piece of petroleum legislation, addressing all operational, environmental and transparency matters suited to petroleum activities.  Modeled on similar legislation promoted by the World Bank, a former World Bank executive referred to the Petroleum Law 2008 as the ‘best petroleum law ever enacted.’  The SOA with Soma is governed by this law.

 The Government is considering an update to the Petroleum Law 2008 to address the new constitutional and other circumstances of the Government and regional member states.  These changes are unlikely to affect the provisions of the Petroleum Law 2008 that are relevant to the operational, environmental and transparency provisions of that law which govern activities under the SOA.

Ø  EAEF Comment: The transaction was entered into in secret, and it is a ‘shady’ deal, with little net benefit to the public.

 MNR Reply: It is unheard of in the oil & gas industry that a seismic option agreement would be negotiated in public, or that the terms of a production sharing agreement be published before an oil company has indicated a desire to enter into it.  In 2014 or 2015, it is possible that Soma may request a production sharing agreement where it has identified a prospect that it wishes to drill.  The production sharing contract will be published at that time.  Some countries with a history of successful oil & gas activity award production sharing agreements by a public auction.  However, Somalia has no record of successful petroleum discovery despite the drilling of over 50 wells.  None of Somalia’s neighboring states where petroleum has been discovered (Kenya, Tanzania, Ethiopia) award petroleum contracts by public auction.  Eight major international oil & gas companies currently hold concessions in Somalia from the 1980s, and every one of them refuse to conduct operations because they consider performance to be impossible in current conditions.  Consequently, in such circumstances, it is entirely reasonable for the Government to directly negotiate the award of a seismic option agreement with a company set up to focus solely on exploring in Somalia and that is prepared to undertake petroleum operations immediately.

There is nothing ‘shady’ about the SOA or Soma.  The SOA is modeled on legal, fiscal and technical terms that are standard in the oil & gas industry.  Soma’s executives include senior executives experienced in oil & gas, finance, administration and government relations, led by Lord Michael Howard and Robert Sheppard (with over 40 years experience at BP and Amoco).  Modern anti-corruption provisions are included in the SOA; if Soma makes or has made any payment to a government official, directly or indirectly, then the SOA and any production sharing agreement issued pursuant to it terminate automatically.

The Somali public will benefit in many ways from the SOA.  It is a first step in the process of assessing whether Somalia possesses valuable oil & gas.  Soma has committed to maximizing the employment of Somali citizens and purchasing goods and services from Somali suppliers.  It is a sign to other oil & gas companies and to the world that Somalia is open for business.