Questions about Somalia’s Oil and Gas Licensing Rounds
There are serious concerns about the legality of the “Production Sharing Agreements” the Somali government is using for the licensing rounds. Troubling questions also persist over whether the concessions given to some foreign companies are value-for-money and in Somalia’s national interest.
A few weeks ago, the Financial Governance Committee (FGC) – a committee chaired by Somalia’s Minister of Finance and includes an advisory panel from the International Monetary Fund, the World Bank, the African Development Bank and representation from Somalia’s donor partners - published its annual Financial Governance Report on Somalia. The FGC was established in 2014 in response to the egregious levels of corruption within the Federal Government of Somalia (FGS), and the continuing pervasive worries about the way the FGS hands out contracts and concessions.
In addition to Somalia’s Finance Minister who chairs the FGC, other FGS members of the FGC include the Governor of the Central Bank, representatives from the President and Prime Minister’s offices, the Chair of the Parliamentary Finance Committee and the Attorney General.
"As regards the Somali government, a long-standing (and undoubtedly well-earned) reputation for incompetence and pervasive corruption is hard to shift. It will not be helped by ignoring the serious issues highlighted by the FGC report or the hope that these concerns will somehow go away. For once, the government should take this opportunity to revisit the whole natural resources licensing processes and do what is in Somalia’s national interest. "
FGC’s primary role is to perform an independent assessment of all major contracts and concessions, applying the “principles of value for money and good governance”. Its remit is to “provide advice on existing concessions and contracts the FGS has entered into, and recommend potential remedies where necessary”.
In July 2020, the FGC issued a report in which they reiterate their continuing concerns about the legal framework for oil and gas contracts and concessions. In particular, the report highlights material discrepancies and persistent questions about the legality of the Production Sharing Agreements (PSA) that Somalia is currently using for the licensing rounds.
Somalia’s production sharing agreements
Production Sharing Agreements (PSA) set out the fiscal terms such as royalties and profit share from oil and gas earnings. It is a key binding document which typically specifies how much the national oil company (which Somalia does not currently have) and exploration company will each receive.
In 2016, Somalia’s PSA was subject to extensive technical and legal review by the FGC, and significant changes to its terms were made. Both the FGC and FGS agreed at the time that the “model” oil and gas PSA, that incorporates FGC’s changes, would be adopted as a basis for all future licencing agreements. However, in February 2019, the FGS held a roadshow in London and the model PSA used for this roadshow was substantially different from the one reviewed by the FGC. According to the FGC, the PSA also contained terms that significantly weakened Somalia’s position.
In addition, neither the PSA nor the accompanying tender protocols were approved in line with the requirements of Somalia’s Procurement Law (an important legal requirement to mitigate the risk of mismanagement and corruption), nor were all documentations for licensing rounds approved by the Inter- Ministerial Concessions Committee – another legal requirement. In essence, the PSA was drafted in a way which was both unfavourable to Somalia and inconsistent with the procurement law. Furthermore, the fiscal terms in the PSA were also not aligned with the Extractives Industries Income Tax (EIIT) legislation (which is yet to be passed). This means another legally important safeguard against fiscal exploitation, and a key requirement for the debt-relief completion point, was completely missing.
In May 2020, the FGS went ahead with a licencing round for seven blocks.
Soma Oil and Gas Ltd & Spectrum ASA
On the 6th of August 2013, the FGS signed a Seismic Option Agreement (SAO) with Soma Oil and Gas Exploration Ltd – “SOMA” - a wholly owned subsidiary of Soma Oil and Gas Holding Ltd. It is a company registered in the United Kingdom. Hassan Khaire (who later became Somalia’s prime minster) was a director and Group shareholder.
FGC’s 2015 report noted that, under the terms of the SOA, SOMA was to (i) undertake seismic surveying in onshore and offshore areas of SOMA’s choice that are not the subject to prior grants of petroleum rights; (ii) after delivering the survey results to the FGS, SOMA had a year of exclusivity to negotiate PSAs with the FGS in 12 offshore blocks of “potential prospectivity” of SOMA's own choosing, covering up to a total of 60,000 km sq.; (iii) the PSAs thus negotiated would remain in force for 8 years; (iv) should a commercial discovery be made, up to 25 years of exploitation would be permitted.
According to FGC's 2015 report, on the 3rd of August 2015, the Somalia Eritrea Monitoring Group report highlighted a letter signed by the Minister of Petroleum on the 8th of May 2014 that extended the offshore area available to SOMA for survey to include the JORA Block (Somalia – Kenya border), which SOMA may also select as one of the areas in which it chooses to negotiate a PSA on an exclusive basis.
On the 31st of October 2015, the FGC noted in its report that, having reviewed the SOMA contract and recommended changes to it, the Somali government remained “unresponsive”. Furthermore, the FGS did not tell the FGC that SOMA’s contract was extended to include JORA Blocks (a significant change of the original contract). The FGC confirm in their July 2020 report that, to date, the Somali government has not incorporated FGC’s recommendations into the SOMA contract.
The FGS also gave concessions to Spectrum ASA in September 2015 for the rights to acquire up to 28,000 kilometres of Multi-Client 2D data. Spectrum was granted the exclusive brokerage rights for an existing 2D dataset of 20,000 kilometres which was acquired and processed in 2014. In this instance, the FGS incorporated the FGC’s recommendations into the Spectrum contract.
What does FGC’s report mean?
FGC's reports raise three important concerns: (i) the legality of the current PSA, (ii) the significance of the SOMA concessions, and (iii) the legal and reputational risks for investors.
(i) The legality of the PSA
If the current PSA neither complies with Somalia’s procurement law, nor incorporates the requirements of the EIIT legislation, it means it cannot be used, calling into question the legality of the on-going licencing rounds. Given the PSA also contains terms that are known to be unfavourable and weaken Somalia’s position, the rush to hold licensing rounds in the circumstances is incomprehensible.
(ii) FGC’s concerns about the SOMA concession
Here there are a number of unanswered questions:
First, Given FGC’s role is providing independent advice, it is not clear why the Somali government is refusing to renegotiate the terms of the concessions given to SOMA – when it is in Somalia’s national interest to do so -, nor has the government publicly set out its reasons why FGC’s recommendations need not be incorporated into the SOMA concession.
Second, the substance of the concessions given to SOMA is also wide-ranging and include a number of important “exclusives”. Generally, concessions are granted after a competitive bidding process and once economic valuations have been modelled and known, taking account of the relevant country-specific and market factors. This allows a country to secure the best value for its blocks.
However, in the case of SOMA, the company was doing the seismic surveys and had the exclusive right to choose the best 12 blocks they wanted, and 25 years of exploitation if there is a discovery. As SOMA is producing the seismic data, they are likely to select the most valuable blocks (which could be worth billions, if not, trillions of dollars and which they can then exploit for the next 25 years as per the concession). The blocks left could be of little value and may not elicit good market interest. It is not clear if this is industry practice and the FGS had not explained why this arrangement secures value-for-money for Somalia.
Third, SOMA was created on the 23rd of July 2013 (the holding company was incorporated a few weeks earlier on the 26th of April 2013). Barely, two weeks later, on the 6th of August 2013, it was able to secure these major concessions. The FGS did not disclose whether there was appropriate due diligence done to ensure that the company had the right market and technical expertise, as well as the resources to fulfil its contractual obligations in a way that did not pose material long-term risks to Somalia.
(iii) Legal and reputational risks for investors
There had always been a growing concern that the sale of Somalia’s natural resources was not driven by national interest considerations. FGC’s reports add important detail and credibility to what the people of Somalia always suspected.
The danger for potential investors is significant. The FGC is chaired by Somalia’s Minster of Finance and includes key representation from the different arms of the government, as well as international development institutions. The conclusions from the FGC therefore reflect the collective views of all of the committee members, including the FGS and cannot easily be dismissed as irrelevant tittle-tattle.
The irony of course is that the FGS members of the FGC are raising these serious issues about their own government. Perhaps, they hadn’t thought through the implications of FGC's report or the fact the FGC report represents their collective views, or perhaps they did. Either way, it is an extraordinary state of affairs. It underlines the need for investors to consider carefully the contents of FGC’s report and the material legal and reputational risks inherent in all of this.
Looking ahead
At the moment, Somalia does not have a government with a parliamentary mandate, exacerbating the risks just mentioned. There is no national oil company that has the responsibility for negotiating concessions and managing revenues in a way that protects the country’s national interest. Moreover, there may be many more concessions and contracts (e.g. fisheries) that we don’t know about, and all of this could well be a tip of a gigantic iceberg.
Natural resource contracts and concessions could last for 25, 30 or 50 years, binding future generations of Somalis for almost eternity. It is therefore imperative that there is a complete moratorium on all agreements, a full independent audit of all contracts and concessions to make sure everything passes relevant legal, value-for-money and national interest tests, followed by a transparent public disclosure of all agreements. This is about Somalia’s future.
There is nothing wrong with foreign companies investing in Somalia and this article does not suggest improprieties in what the companies named here are doing in Somalia. The article merely poses questions and emphasises Somalia’s national interest must always be paramount.
As regards the Somali government, a long-standing (and undoubtedly well-earned) reputation for incompetence and pervasive corruption is hard to shift. It will not be helped by ignoring the serious issues highlighted by the FGC or the hope that these concerns will somehow go away. For once, the government should take this opportunity to revisit the whole natural resources licensing processes and do what is in Somalia’s national interest.
For investors, it is caveat emptor.
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The personal views, thoughts and opinions expressed in the text belong sorely to the author, and not necessarily to the author’s employer, organisation or other group or individual. The information in this article is entirely based on the FGC publication and the author takes no responsibility for the accuracy or completeness of the information in the FGC reports.
Sources:
FGC July 2020 Report: https://mof.gov.so/sites/default/files/2020-08/Financial%20Governance%20Report%202020%20-%20English%20Report.pdf
FGC Contracts and Concessions (August 2016): https://mof.gov.so/sites/default/files/2018-10/Third-FGC-Contracts-and-Concessions-Report.pdf
FGC Contracts and Concessions (October 2015): https://mof.gov.so/sites/default/files/2018-10/Second-FGC-Contracts-and-Concessions-Report_0.pdf
Spectrum Annual Report 2015: https://www.spectrumgeo.com/wp-content/uploads/SPU-Annual-Report-2015-RO.pdf
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