Somalia deal raises concerns about oil risks

Oil & Gas
Tuesday, August 13, 2013

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The signing of the new Somali government’s first oil contract with an untested company linked to a British peer raises concerns about whether the dash for oil wealth will destabilise the east African country.

Last week, Michael Howard, a former leader of Britain’s ruling Conservative party and chairman of Soma Oil and Gas Exploration , signed a contract in Somalia with Mogadishu to collect data on onshore and offshore oil . It was the first such contract by any international company.

In exchange for collecting data, Soma has the right to apply for up to 12 oil blocks in an area seen by oil majors as one of the final frontiers for the commodity. The company, which has not undertaken a seismic survey before, was incorporated in the UK last month with capital of £0.001.

“We have looked [at] the contract from the perspective of what’s good for Somalia,” said Abdirizak Omar Mohamed, Somalia’s natural resources minister. The newly formed government of which he is a member is the first Mogadishu administration to gain international recogntion in decades.

“This investment is going to be very good for the country and we’re hoping that other investors come too,” he said. “These are people . . . who have expertise in the area of oil and gas, and people who are well respected in the UK.”

The Mogadishu government had said in May that it would not sign any oil deals until contradictions within the legal framework were ironed out. It has yet to do this, but the minister said they intended to do so.

“I do not think this deal was done transparently at all,” said Abdillahi Mohamud at the East African Energy Forum, a lobby group consulted by Somali parliamentarians who are considering their reaction to the deal.

As the UK, Norway, Turkey, Qatar and others vie to gain influence in Somalia’s oil-rich waters, analysts fear big-power oil politics could put its fragile recovery off course. A UN panel of experts cautioned in a report last month that oil could lead to conflict between rival groups – some of which have previously been allied to al-Qaeda-affiliated jihadists – and threaten peace.

“[Oil] companies should cease and desist negotiations with Somali authorities,” the UN panel said in last month’s report to the Security Council.

Mr Abdillahi sees the deal in the context of regional politics. “This [the deal] is about . . .[the central government] attempting to gain the upper hand namely on [the regions],” says Mr Abdillahi. He believes there may be “many hidden agendas” and believes the deal is “political in nature”.

The deal has unsettled some industry observers who had expected a public licensing round for all the oil blocks. Other more experienced companies had also been queueing up for contracts to undertake surveys. They say it is unusual for Soma, once it has gathered the data, to be able to cherry-pick the best dozen blocks.

Some oil majors, including Shell and Total, have put their claims to oil blocks they signed for in the late 1980s on ice until, Shell says, “conditions allow”.

Soma says it will not impinge on their areas, nor on territories that do not acknowledge the Mogadishu government, such as Somaliland and Puntland.

Soma’s management can draw on an “absolutely unrivalled track record”, Lord Howard said in an interview with the Financial Times, pointing to Soma chief executive Robert Sheppard, an adviser to BP in Russia. The company can also easily raise the money, he said.

“I think our agreement is very much in the interests of the people of Somalia,” he said. Asked about the preferential access to the oil blocks in return for the geological databank, Lord Howard said it is “obvious . . . that we should have a quid pro quo”.

The deal has prompted some concern from the UK’s diplomatic partners about the UK’s relationship with Somalia. Mark Simmonds, UK Africa minister, hosted a government-sponsored investment event on May 8, in which the Somali president and 16 UK energy companies, including Lord Howard’s, took part. Senior UK civil servants also met Lord Howard on June 7 to discuss Somalia.

“The UK is promoting transparent and accountable government [but it] hosted a conference and invited all of us,” said a diplomat who follows Somalia closely. “Then that momentum was used to promote British business interests: that could maybe have been more transparent.”

Mr Sheppard, Soma chief executive, said he didn’t know “why they’ve [the government] accepted it now when earlier they might not have”.

Both sides had independent legal advice and Lord Howard said that he “went to some lengths to impress on the Somali government that it was very important that they had independent legal advice”.

He added that he had checked with the UK government to ensure he was doing nothing against UK policy. “I don’t think I’m there for any political influence, I don’t think I have any political influence any longer,” he said. But the reason the deal went ahead “may well be because of the leading role that the UK government has taken that [the Somali government] were well disposed towards a British company”.

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