Embed Size (px)
Citation preview
Needs Assessment for the Development of Somalia's Extractive Industries
March 2014
Acronyms / Abbreviations
AfDB African Development Bank
bcm Billion cubic metres
bpd Barrels per day
CSO Civil Society Organisation
DFID Department for International Development
EEZ Exclusive Economic Zone
EI Extractive Industries
EITI Extractive Industries Transparency Initiative
EU European Union
FGS Federal Government of Somalia
FM Force Majeure
IA International Alert
IAEA International Atomic Energy Agency
LNG Liquefied Natural Gas
MNR Ministry of National Resources
NPT Non-Proliferation Treaty
PFM Public Financial Management
PSA Production Sharing Agreement
SEMG Somalia Eritrea Monitoring Group
SOA
SSA
Seismic Options Agreement
Sub-Saharan Africa
SPC Somali Petroleum Corporation
TcF Trillion Cubic Feet
UN United Nations
UNODC United Nations Office on Drugs and Crime
4
Table of Contents
1. Summary .......................................................................................................................................................................................................... 7 2. Next Steps ...................................................................................................................................................................................................... 9 3. Important changes in the Somali political arena since the report was initially drafted .....................10
A. Context and approach .................................................................................................................................................................................. 11 1. Context ............................................................................................................................................................................................................11 2. Our approach to the assignment ................................................................................................................................................11
2.1. Terms of reference .........................................................................................................................................................................11 2.2. Approach ................................................................................................................................................................................................12 2.3. Methodology .........................................................................................................................................................................................12
B. The extractive industry globally: industry context and political economy implications ................................. 14 1. Industry context ........................................................................................................................................................................................14
1.1. From exploration to production: the rare guarantee of wealth creation ................................................14 1.2. Increased demand and increased exploration: heightened chances of attracting investment .14 1.3. Key corporate players ..................................................................................................................................................................15
2. Natural resources in Africa ..............................................................................................................................................................15 2.1. Africa’s vast untapped potential ............................................................................................................................................15
3. East Africa and its impact on the oil and gas industry.............................................................................................16 3.1. East Africa is under-explored ................................................................................................................................................16 3.2. East Africa is close to growing demand centres ......................................................................................................16 3.3. East Africa’s deep offshore is now technically accessible and is promising ........................................16
4. Potential impact of resource discoveries ...............................................................................................................................17 4.1. Fiscal independence and growth ..........................................................................................................................................17 4.2. Political resource curse ...............................................................................................................................................................19 4.3. Onset of violent conflict and civil wars...........................................................................................................................19
C. Somalia’s EI sector: state of play ........................................................................................................................................................ 24 1. Somalia’s natural resource endowment ...................................................................................................................................24
1.1. Hydrocarbons ......................................................................................................................................................................................24 1.1.1. Lack of data and asymmetry of information ....................................................................................................24 1.1.2. Promising geological constructs..................................................................................................................................24
1.2. Minerals ...................................................................................................................................................................................................26 2. Deals in Somalia’s extractive industries sector ..................................................................................................................26
2.1. Pre-1991 legacy ................................................................................................................................................................................26 2.2. Current deals.......................................................................................................................................................................................27
2.2.1. Federal Government of Somalia .................................................................................................................................27 2.2.2. Puntland .......................................................................................................................................................................................28 2.2.3. Somaliland ..................................................................................................................................................................................28
D. Somalia’s EI sector: findings, analysis and recommendations ......................................................................................... 30 1. Sound political governance: conflict prevention should be a key consideration for the
development of the sector .............................................................................................................................................................................31 2. Vision, policy and legislation ...........................................................................................................................................................33
2.1. A shared vision for the sector should inform the development of a sector legal framework33 2.2. Issues of nuclear security in the minerals sector should be addressed ................................................36
3. Transparent sector governance: transparency and accountability in the sector need to be
ensured as a matter of priority ..................................................................................................................................................................37 4. Community engagement: social risk associated with the development of the sector needs to be
addressed in the short term .........................................................................................................................................................................39
5
5. Sustainable resource extraction: the legal framework for environmental protection should be
strengthened and implemented .................................................................................................................................................................. 41 6. Revenue management: a number of outstanding issues in the medium-term ........................................... 42 7. Equitable economic growth has a broad significance in the medium/long-term .................................... 43 8. Effective and efficient institutions: at the heart of the issue is not the abundance of the
resources themselves, but how they are governed ..................................................................................................................... 44 E. The way forward ...............................................................................................................................................................................................46
1. Options considered ............................................................................................................................................................................... 46 1.1. Option 1 (Rejected): Do nothing .......................................................................................................................................... 46 1.2. Option 2 (Rejected): Provide capacity building and technical assistance package to the
relevant Federal institutions..................................................................................................................................................................... 47 1.3. Option 3 (Recommended): Provide comprehensive, flexible and sequenced support to a)
facilitate resolution of critical issues, b) address priority technical areas and c) support institutional
capacity building .............................................................................................................................................................................................. 47 2. Key components of recommended assistance .................................................................................................................. 49
2.1. PROGRAMME 1: Set up an Extractives Technical Advisory Panel of international and national
experts .................................................................................................................................................................................................................... 49 2.2. PROGRAMME 2: Provide long-term and significant technical support ....................................................... 52
3. Consultations held around the report’s recommendations ....................................................................................... 53 F. Annexes ...................................................................................................................................................................................................................54
Annexe 1 - Summary: deals in Somalia’s EI sector .................................................................................................................... 54 Annexe 2 - Open letter from the Somaliland’s Saraar community and diaspora (2013) ................................ 56 Annexe 3 - List of stakeholders consulted........................................................................................................................................ 58 Annexe 4 – Presentation for Feedback session ............................................................................................................................. 61 Annexe 5 - The consulting team .............................................................................................................................................................. 77 Annexe 6 - Adam Smith International’s Extractive Industries Governance Service ................................................ 77
6
Disclaimer
This report has been produced by Adam Smith International whose sole motivation in writing this report and
recommendations is the sustainable development of Somalia’s extractive industries, and the stability, economic growth
and poverty reduction they could bring.
This report was funded and delivered to the British Government’s Department for International Development on the basis
that Adam Smith International is an independent and professionally objective firm. The views expressed in this report are
therefore the views of Adam Smith International.
7
1. Summary
Following a request for assistance on extractive industries development from the Federal Government of Somalia in
2013, the UK’s Department for International Development in Somalia undertook initial consultations and commissioned
this needs assessment in September 2013.
This resulting report makes actionable recommendations for the sustainable development of Somalia’s extractive
industries. It serves to identify the immediate steps that Somalia must take to ensure that it can mitigate the risks and
leverage the significant opportunities of resource exploitation. The recommendations are evidence-based, and derived
from wide-reaching and comprehensive consultation with representatives of all key stakeholder groups in Somalia,
including the key institutions at the federal and regional levels, as well as institutions of the supporting international
community. This is complemented by international best practice, expertise and seasoned experience.
The overarching objective of the study is to support all stakeholders to devise a fit-for-purpose programme of
development of Somalia’s extractives sector to optimise benefits of all Somalis, now and in the future. Guiding the
development of this report is the critical need to ensure a conflict-free, stable and successful extractives sector that
contributes positively to Somali peacebuilding and sustainable economic growth.
The table on the next page summarises the report’s priority recommendations, grouped by the timeframe and sequence
in which they need to be taken forward. The subsequent sections contain the methodology, contextual information,
expanded details of the recommendations, stakeholders consulted and the consulting team. The recommendations
presented require further more detailed assessment and refinement. The next step will be to establish appropriate
strategies for implementation. The main recommendations made are:
1. Immediate and time bound assistance through the establishment of an Advisory Technical Panel tasked with
provision of technical support and institutional capacity building around the issues of resource ownership and
revenue-sharing, and facilitation of an inclusive consultative process between Federal and Member State
authorities to resolve these issues.
2. Long-term and significant technical support provided upon resolution of resource ownership and revenue-sharing
arrangements under Programme 1.
The scope of this report is broad and as a result captures a number of issues. There are thematic issues which run
throughout the report, in particular, conflict mitigation, which essentially – and necessarily in Somalia – underpins all
recommendations. The political backdrop, including the on-going process of federating, has been considered throughout.
There are several recommendations and actions that require urgent attention if stability and growth are to be protected
in the Somali region. Adam Smith International urges the Federal Government of Somalia and its partners and
stakeholders to eschew inertia and take immediate steps to address these.
The study provides objective expert analysis, and is independent of any one stakeholder party, including the
governments of Somalia or the United Kingdom.
8
Recommendation Summary Priority Timing
2014
2015
2016
2017
2018
Category
Programme 1
1
Establish a shared policy on
jurisdictional and revenue-
sharing mechanisms through an
inclusive consultative process
facilitated and supported by
independent technical experts
V.
HIGH 2014 Sound Political Governance
2
Capacity building in key Federal
and regional institutions. Initial
focus on jurisdictional and
revenue-sharing issues
V.
HIGH 2014-16 Sound Political Governance
3
Develop and implement
comprehensive safeguards
agreements for the uranium
deposits through IAEA
protocols.
HIGH 2014 Sound Political Governance
4
Review and strengthen the draft
Petroleum legislation, in
alignment with Constitutional
drafting
MED 2014-16 ALL
5
Develop and adopt a “Charter
of Good EI Sector Governance”
through broad stakeholder
involvement
MED 2014-16
Transparent Sector
Governance
6
Raise stakeholders’ awareness
of, and adopt international
standards on business and
conflict.
HIGH 2014-16 Community Engagement
Programme 2
7
Upon resolution of critical
issues, provide long-term and
significant technical assistance
HIGH 2015-18 All
9
2. Next Steps
For each recommendation, immediate actions have been highlighted. These are the practical steps considered critical to
initiating the implementation of the respective recommendation.
In addition, there are a number of overarching next steps, and these are listed below:
A. Somali Federal and regional authorities to engage with development partners to indicate required support. This
includes designing, prioritising and refining interventions, and agreeing timing, counterparts and ways of working.
B. Development Partner arrangements to be agreed upon. Due to their relative neutrality, multilateral agencies or
multi-agency modalities are best placed to mediate, promote and advance the necessary dialogue. Specific
delivery and financing arrangements will need to be finalised as a matter of priority - regardless of which
modality is preferred, it is important to emphasise that expediency is critically important.
10
3. Important changes in the Somali political arena since the report was initially drafted
The bulk of this report was written between September and December 2013 when most of the interviews with
stakeholders were conducted by the assessment team. The backdrop of Somalia politics has changed a little since and
the team has incorporated feedback from the new political leadership of the Federal Government of Somalia and
Puntland. It is also important to know that the Federal Government has also changed the structure of the relevant
ministries since the report was first drafted.
Key changes
FGS Cabinet Reshuffle
On 21 January 2014, Somali Prime Minister Abdiweli Sheikh Ahmed’s new cabinet was approved by a large margin of
Somalia’s parliament with 186 MPs voting in favour, 46 against, and 1 abstaining. This led to not only the appointment
of new Ministers but also to new Ministries being created and portfolios being switched.
FGS Change in Ministerial Portfolio
Prior to the Cabinet reshuffle of January 2014, the Minister for National Resources controlled a vast portfolio which
included all mineral resources as well as water, fisheries, land and other “national” resources. The new cabinet now has
a dedicated Ministry for Mineral and Petroleum which would be the essential counterpart for the suggested programmes
in this report.
Puntland Presidential Elections
On 8th January 2014, Former Somali Prime Minister Abdiweli Mohamed Ali was elected President of Puntland
11
A. Context and approach
1. Context
The medium and long term economic development potential of the hydrocarbon sectors in Somalia could prove to be
greater than any other sector in the national economy. Despite the limited availability of data, there is a general
consensus that Somalia’s onshore resources could be just as significant as those of Ethiopia, Yemen, or other
neighbouring countries.
As a major portion of the East African margin of the Indian Ocean is in Somali waters, the promise of the sector has
become even greater since deep-sea exploration and production was made technologically possible just a decade ago.
The extractive industries (EI) sector could provide substantial benefits to Somalia, including increase in foreign direct
investment, job creation, infrastructure and a boost to government revenues.
However, the country is at the beginning of a long and complex process with uncertain outcomes. Somalia’s resources
could help to create prosperity or could provoke renewed conflict, as has been demonstrated by the experience of
many countries (Chad, Sudan, Congo Republic, Angola, Nigeria, Indonesia etc.). International experience also shows that
whether resources turn out to be a blessing or a curse largely depends on the ability of the governments to manage
these resources well, and distribute benefits equitably.
On a technical level, the development of an EI sector presents formidable challenges – it is technologically difficult, and
environmentally and socially impactful. This is the reason why the EI sector is amongst the most regulated industries in
the world. With a legacy of conflict and statelessness, it is hardly surprising that the Somali authorities are at present
ill-prepared to develop the necessary regulatory environment, negotiate favourable deals and manage them well. Human
capacity deficits are compounded by a weak institutional set-up. The need for technical assistance is both significant
and immediate.
Above and beyond the technical level, major players in the industry have indicated that they regard a degree of political
stability as a prerequisite to making the significant investments needed for project development, which may be as high
as tens of billions US dollars. In this context, the main stumbling block in Somalia is the lack of clarity and consensus
on property rights over resource wealth and a revenue-sharing formula within the Federation. This view was shared not
only by major companies, but also by virtually all Somali stakeholders consulted, at the federal and regional levels.
The contestation around control of natural resources was cited as a primary destabilising issue that is already showing
some signs of political fissions or fractures. Most stakeholders interviewed believed that the pathway to obtaining natural
resources in Somalia, particularly oil, will led to conflict.
At the same time, the political and economic pressures and opportunities to begin reaping the rewards of the Somali
extractive sector appear, to some, to be urgent. Indeed some actors are confident that Exploration and Production
Sharing Agreements, if written comprehensively, could compensate for the lack of national legislative frameworks, the
void in resolving federal wealth sharing arrangements, and could cover all arrangements and all ramifications.
The questions then, are: can the Somali extractive sector be developed at the nascent stages of the development of a
constitution, and legal, federal and regulatory frameworks? Will developing the EI sector strengthen or destabilise the
federal state? What are the costs of action in this sector, versus the costs of inaction? And what measures are viable
in the short-term, whilst supporting longer-term and ‘good-enough’ institutional and economic transformation?
2. Our approach to the assignment
2.1. Terms of reference
In 2013, the Federal Government of Somalia requested technical support from the UK government to help develop the
EI sector for the benefit of all Somalis. This needs assessment advised on what support is required in the short to
medium term, and who is best placed to provide that support.
The Terms of Reference of this assignment required attention to both the hydrocarbon and mineral sectors of Somalia.
However, in the course of work it was deemed necessary to place a more significant focus on the oil sector. Key issues
related to mineral wealth are registered and clearly marked.
12
The findings and recommendations contained in this needs assessment are those of the authors and do not represent
the views of the governments of Somalia or UK. While we hope that future support to the sector will be informed by its
conclusions, this is an independent piece of work.
In the Somalia extractive industries context, it is important to note that no commercial interests have influenced this
assessment or its conclusions. To avoid any conflicts of interest, Adam Smith International advises only Governments
and not international corporations.
This approach is fully and explicitly supported by DFID.
2.2. Approach
The Needs Assessment was carried out between September and November 2013. The draft recommendations were then
submitted and discussed with the Federal Government, the Regional Administrations as well as with the international
community between December 2013 and the publication of the report. Approximately 60 people were consulted from the
public sector, private sector, civil society, development partners and an international security firm.
The study combined desk research and interviews with a wide range of stakeholders in Mogadishu, Hargeisa, Nairobi,
London and other locations. The questions were open ended to elicit the broad insights of the respondents on the
extractive industry in Somalia, the activities of their organisations, the challenges faced and their recommendations.
The team consulted representatives from key Somali public institutions at the Federal and regional levels, including
Federal: Parliament, the Ministry of National Resources, and the Ministry of Finance and Planning;
Puntland: Presidency and Ministry of Finance; Ministry for Petroleum and Mining;
Somaliland: Ministry of Mining, Ministry of Environment, Ministry of Commerce and International Investments; and
Galmudug: Presidency.
On the private sector side, the team consulted the Somali business organisations and sector lobby groups, as well as
national and international investors in Somalia’s oil sector. The team also consulted civil society organisations, Somali
intellectuals, international analysts and multilateral and bilateral development organisations.
Given the complexity of the sector, and logistical and security challenges, one limitation of the study is that the team
was unable to interview a broader range of stakeholders in Somalia. Notwithstanding this, Adam Smith International is
confident that the report captures the broad and sufficient range of perspectives that is necessary for its
recommendations to be both credible and feasible.
2.3. Methodology
The development of a country’s natural
resources is a complex task that requires a
comprehensive approach. The assessment
team relied on Adam Smith International’s 8-
point framework (diagram to the right), which
is our pragmatic and proven approach to
good EI sector governance. This clear
framework aligns with internationally accepted
typologies.
In the context of Somalia, the challenges this
sector poses are further complicated by
ongoing violent conflict
process of federating and state formation
administrations competing over resources
and legitimacy
misalignment of the constitutional and sector
Adam Smith International: 8 Principles of
Extractives Good Governance
13
legislative framework
legacy of pre-1991 oil deals and recently signed deals
To respond to these specific circumstances and to identify and sequence short- and medium term measures applicable
at this stage of the country’s development, the assessment team placed a premium on the sound political governance
prerequisite, and analysed all topics from the point of view of conflict prevention.
14
B. The extractive industry globally: industry context and political economy implications
1. Industry context
The discovery of significant natural resources can be a game changer for any country. But one crucial thing to bear in
mind is the timelines of the extractives industry. Even in a best-case scenario with accelerated timelines, the lead-time
between a company showing interest in acquiring acreage in a country, through to the initial exploration phase (seismic
shooting), the drilling phase and the production phase is at least 6 to 10 years. These timelines can shift depending on
many factors that include the state of
infrastructure, complexity of the drill, and
the time taken for contract negotiations.
Political, commercial and technical factors
can and will affect the timeline. It is
therefore crucial that all stakeholders be
aware that the economic impacts can
take a long time to materialise.
1.1. From exploration to production: the rare guarantee of wealth creation
Traditionally the production of minerals and hydrocarbons is geared towards the highest paying markets. When demand
is high there is little or no incentive to focus on local demand in developing (yet producing) nations. It also means that
if the resources found are insufficient to be exported, international companies will not develop the assets as more often
than not local demand is a) insufficient, b) not commercially attractive. Therefore, having natural resources does not
necessarily mean that production (and wealth) will follow. The assets have to be material enough to justify the
investments required to produce. This explains why East African exploration has focused on the Deep Offshore where
significant material finds are more likely than onshore given the geology.
1.2. Increased demand and increased exploration: heightened chances of attracting investment
Over the last decade, the inflation adjusted price of oil has increased from $29.49 on average in 2003 to $87.52 on
average in the first half of 2013, with a peak at $98.58 in 2008. Other hydrocarbons and minerals have also witnessed
massive price fluctuations (on an upward trend) during that same time period.
This has led to a global increase in exploration and production pushing the industry (international oil companies, mining
companies, minnows, frontier exploration groups and others)
to explore more technically challenging areas and riskier
countries, reaching areas of the globe where exploration
previously had been very restricted. This includes the Arctic,
deep-offshore Brazil and also West and East Africa. With
rising global demand and OPEC production lagging, oil and
mineral production has spread to more low-income
countries. New and likely new producers include:
Latin America: Guyana and Cuba
Southeast Asia: Cambodia and East Timor
Africa: Ghana, Guinea, Guinea-Bissau, Kenya, Liberia,
Mali, Mauritania, Mozambique, Sao Tome, Senegal,
Sierra Leone, South Sudan, Tanzania, Togo, and
Uganda.
15
1.3. Key corporate players
The extractives sector, and particularly oil, is a high risk/high reward undertaking. The approximate cost of onshore
drilling is $20 Million/well, while offshore can exceed $100 Million/well. One in ten wells proves viable, and the
associated development cost can range between $0.5 - $3 Billion1.
The strategies employed by the corporate sector are determined by their ability to make large investments/raise capital
and by their sensitivity to political and reputational risk.
Drivers Likely Actions Impact / Issues
Unquoted, small companies with limited proven experience
First mover advantage One on one deals with governments Limited technical expertise. Limited
social / environmental standards.
Will outsource work (seismic)
Low cost for high impact Focus on short term quick wins
Sell significant finds on to larger players at a
profit
Minnows and Midcaps – listed companies with existing operations
Share price Invest in frontier acreage Focus onshore or easy offshore if
they have the expertise
First mover advantage Willing to take more risks Cannot make large investments
Risk taking (to get in before
majors)
Sell significant finds on to larger players at a
profit
Will apply a certain level of
environmental and social standards
Majors (e.g. pre-1991 license holders)
Secure existing assets Hold long negotiations In it for the long run
Ensure security of operations Ensure legality of actions Focus on offshore (deep and ultra
deep)
Reputation Focus on high value plays Apply environmental and social
standards
Use technology as a
differentiator
Could develop infrastructure for
significant discoveries
2. Natural resources in Africa
2.1. Africa’s vast untapped potential
The estimated value of known natural resources in OECD countries is about US$114,000/km2. This amount compares
with the estimated natural resource wealth in Africa of US$23,000/ km2. Since natural resources are randomly
distributed, Collier2 argues that Africa is also expected to have a distribution of natural resources similar to that of the
OECD countries. The low estimate is therefore simply to be taken as an indication that resources in Africa, so far, are
largely undiscovered.
1 EAEF. 2013. Strategy for Somalia’s Resources. 2 Collier, P. 2010. The Plundered Planet.
16
Africa’ share of global oil and gas production approximates an average of 10% and 6% respectively over the past 3
years. The total production of crude oil in Africa in 2013 is likely to be around 8.9 million barrels per day. Of that
amount, sub-Saharan Africa (SSA) will produce around 5.9 million bpd – compared to estimates of 5.5 million bpd in
2012 – and assuming that at least 150,000 bpd of South Sudan’s 350,000 bpd production returns permanently to
market.
Africa also produced an estimated 230 billion cubic metres of natural gas in 2012, and this is likely to increase to
around 250 bcm in 2013, with new supplies from Angola, Mozambique and Tanzania.
This highlights the growing importance of SSA as a whole and of East Africa in particular as significant hydrocarbons
regions.
3. East Africa and its impact on the oil and gas industry
3.1. East Africa is under-explored
Traditionally East Africa was not a focus for exploration and, compared to
West Africa, it has been significantly underexplored. But as demand has grown
exponentially in Asia, and frontier explorers found success in East Africa, so
has exploration and production in the region increased. The number of rigs is
increasing every year and with that so does the chance of significant, material
finds.
Countries like Mozambique, Tanzania, Uganda, Ethiopia are paving the way for
significant exploration and production of hydrocarbon based resources in the
region.
3.2. East Africa is close to growing demand centres
East Africa’s geographical proximity to Asia and the significant markets of China and India makes the region an ideal
trading partner and potential oil exporter. China’s and India’s combined oil demand is still in its infancy, around 1.3
barrels per person per year, compared to about 4.4 in the developed world. China’s population is ~1.34 billion with India
tracking closely behind at ~1.21 billion.
This guarantees an export market should hydrocarbon finds be significant enough to justify production for an export
market.
3.3. East Africa’s deep offshore is now technically accessible and is promising
Deep-sea exploration and production was all but technically impossible a decade ago. Now technology has allowed
majors to explore and produce at depths of up to 3,000 meters making frontier acreage like the East African Indian
Ocean more accessible and more attractive to companies with a technical competitive edge.
Recent activity in Kenya and Uganda was led by small and medium companies and they proved successful, attracting
bigger players to the scene. As a result, Kenya has been able to award licences to companies capable of working in
deep-sea offshore blocks such as Shell, Total, Eni or BG.
17
The table below highlights the significant discoveries that have taken place in East Africa over the last five years.
Somalia’s extended coastline, – the longest in Africa – its strategic location as the gateway to the Gulf States makes
Somalia quite promising as the bulk of the Indian Ocean margin lies within the country’s territorial waters.
4. Potential impact of resource discoveries
4.1. Fiscal independence and growth
Where managed well, the EI sector has engendered a highly positive impact - increase in foreign direct investment, job
creation, significant infrastructure, and substantial government revenues. The recent experience of Botswana and Ghana
demonstrates that the resource curse is not inevitable as long as the right policies and strategies are firmly in place.
The two countries have used their natural resource wealth to generate strong economic growth, foster sustainable social
development and significantly reduce poverty levels.
Botswana
Botswana is one of only thirteen economies in the world to have achieved a sustained GDP growth of 7 percent
or more in the post-war period according to the Growth Report by the World Bank’s Commission on Growth and
Development. Among the natural resource rich countries, Botswana ranks alongside Brazil, Indonesia, Malaysia,
Oman and Thailand.3
This rapid economic growth was driven by the discovery of diamonds soon after independence in 1966. Diamonds
are the main contributor to government revenue, exports and GDP. Botswana’s diamonds are mined mainly by
Debswana Diamond Company, a Government of Botswana and De Beers 50-50 joint partnership. Debswana is the
world’s leading diamond producer by value and produces in excess of 70 percent of Botswana’s export earnings,
30 percent of GDP and 50 percent of government revenue. In 2010, Debswana’s revenues totalled Pula 18.34
billion (US$ 2.79 billion).4
3 Commission on Growth and Development. 2008. The Growth Report: Strategies for Sustained Growth and Inclusive Development.
The World Bank, Washington, D.C. 4 Debswana. 2011. Report to Stakeholders 2010–2011 and http://www.debswana.com/About%20Debswana/Pages/Introduction.aspx
(accessed 13 June 2013)
Country Notable oil & gas discoveries Proposed infrastructure Companies
Mozambique 32-65 Tcf of recoverable gas resources
in Area 1 (Anadarko) and 75 Tcf gas
in place in Area 4 (Eni)
LNG Plant and supporting
infrastructure
Anadarko and Eni
Tanzania More than 20 Tcf of recoverable gas
resources in Blocks 1-4
LNG Plant and supporting
infrastructure
BG Group, Statoil, Ophir
Energy, ExxonMobil, Aminex
Uganda 18 commercially viable oil and gas
fields from 2006 to 2011
oil refinery in Uganda and
export pipeline via Kenya
Tullow, Total, CNOOC
Kenya Ngamia-1 and Twiga
South-1 oil wells in 2012
New reversible product pipeline
to Uganda; increase capacity at
Mombasa; LAPSSET project
Tullow
Madagascar Heavy oil at the Tsimiroro field Oil pipeline from Tsimiroro to
the coast; oil export terminal;
supporting infrastructure
Madagascar Oil
18
Botswana
Botswana’s efficient exploitation of its resource rents is attributed to having good policies which effectively protect
the property rights of investors, provide political stability and encourage public participation, and ultimately
promote investment and economic development.5
Ghana
Ghana is one of Africa’s fastest growing economies, recording 14.3 percent in 2011 according to the World Bank’s
World Development Indicators. Ghana’s extractive sector straddles the oil, gas and mining sectors. It recently
became one of Africa’s new oil producers, with the discovery of major offshore oil reserves in 2007 and
production officially beginning in 2010. Between January and June 2012, Ghana received US$ 327.17 million from
petroleum exports.6
Ghana’s mining sector makes a significant contribution to the economy. It has a long history of gold mining, which
accounts for over 80% of the total income from the sector.7 Ghana was the ninth largest gold producer in the
world in 2009 (accounting for nearly 4 percent of global production) and the second in Africa. A significant local
supplier industry has developed to support the mining sector including in construction, distribution, metals and
metalworking, chemicals, civil engineering, business services and logistics. In 2008, the reported spending on local
purchases (excluding fuel and power) by major gold mining companies was US$467 million.8
Ghana signed on to the Extractive Industries Transparency Initiative (EITI) in 2003 and became compliant in
November 2010. The Ghana Extractive Industries Transparency Initiative (GHEITI) has issued reconciliation reports in
the mining sector, covering the period 2004 to 2009. The initiative was extended to cover the oil and gas sector
in September 2010.9
5 Rodrik, Dani (ed). 2003. In search of prosperity: Analytic narratives on economic growth. Princeton and Oxford: Princeton
University Press, pp. 481. 6 Republic of Ghana. 2012. Public Interest and Accountability Committee (PIAC) Report on Management of Petroleum Revenues for
the Period 1st January 2012 to 30th June 2012 7 Ministry of Finance and Economic Planning (GHEITI). 2013. Final Report on the Aggregation/Reconciliation of Mining Sector
Payments and Receipts: 2010-2011. 8 Morris, Mike; et al. 2012. One Thing Leads to Another: Promoting Industrialisation by Making the Most of the Commodity Boom
in Sub-Saharan Africa. 9 Ministry of Finance and Economic Planning (GHEITI). 2013. Final Report on the Aggregation/Reconciliation of Oil and Gas Sector
Payments and Receipts: 2010-2011.
19
4.2. Political resource curse
According to a number of analysts10, oil and mineral production in low-income countries typically leads to a political
resource curse. Larger oil discoveries in non-democratic countries are strongly linked to slower transition to democracy.
Recent analysis11 indicates that a nondemocratic country which found oil is about 10 percentage points less democratic
than one that did not three decades after the year of peak discovery. As Thomas Friedman put it, “You give me $18-a-
barrel oil and I will give you political and economic reform from Algeria to Iran.”
On a related note, research12 indicates that if the quality of the democratic institutions is relatively poor, “point source”
natural resources (e.g. oil, minerals, and plantation crops) are associated with increased corruption. According to
Transparency International’s “Corruption Perception Index” for 2013, out of 177 ranked countries, 16 of the 20 most
corrupt countries are oil-producing states.
4.3. Onset of violent conflict and civil wars
While the number of wars in the nonfuel/non-diamond states dropped after 1992, wars in the fuel- and diamond-rich
states accounted for a growing proportion of the world’s civil wars. The availability of oil, gas, and diamond wealth is
thus correlated with the onset of civil wars. A country with $1000 in oil rents (e.g. Venezuela, Iraq, or Gabon) has about
double the conflict risk of a similar country with no petroleum.
10 Ross, M. L. (2004). What Do We Know about Natural Resources and Civil War? Journal of Peace Research, 41(3), 337–356. 11 Ross, M. 2011. The Political Economy of Resource Discoveries; Tsui, K. K. 2005. More Oil, Less Democracy ?: Theory and Evidence from
Crude Oil Discoveries. 12 Bhattacharyya, S., & Hodler, R. 2008. Natural Resources, Democracy and Corruption; Isham et al. 2005) and Isham, J., L. Pritchett, M.
Woolcock, and G. Busby (2005). The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of
Economic Growth, World Bank Economic Review 19, 141-174.
Number of autocracies and democracies: Globally and oil producers (right)
Source: Ross (2011)
Source: Ross, 2011
20
There is strong emerging evidence13 that resource wealth has not only made conflict more likely to occur, but also
last longer, and produces more casualties when it does occur. Recent studies show special concern for Africa,
where a rising fraction of the world’s civil wars are found14. Oil-producing states with recent conflicts include:
Latin America: Colombia, Peru, Bolivia, Ecuador
Southeast Asia: East Timor, Myanmar, Thailand, Indonesia
Former Soviet Union: Russia, Azerbaijan
Middle East: Iran, Iraq, Algeria, Yemen, Libya, Bahrain, Syria
Africa: Chad, Sudan, Congo Republic, Angola, Nigeria
Recent research offers a number of theories to explain the link between resource wealth and war15 (The most robust
correlations are presented below). It must be noted that all standard links between resources and conflict exist in the
Somali region. At this pre-discovery stage, the most relevant correlations are associated with: heightened risks of
separatist movements, clashes with local communities and pre-emptive repression by government forces or private
security providers, and fuelling insurgencies. Further risks of violent conflict are associated with the expected flow of
resource revenues in the medium to long-term. In general, offshore resources are less conflict-prone than onshore
resources.
Onshore oil motivates separatist movements
Resource wealth heightens the likelihood of civil war by increasing the value of sovereignty in resource-rich regions.
Collier & Hoeffler (2002), suggest that the “allure of claiming ownership of a natural resource discovery” gives
populations in peripheral regions an incentive to establish sovereign states.
This incentive is often less rational than it appears, since people tend to exaggerate the value of the resource rents
available for capture and their own capacity to extract it/contract extraction. The likelihood of resource-based
secessions is therefore higher when the economic value of the resource is more difficult to estimate – as is the case
13 Ross, M. (2004). How Do Natural Resources Influence Civil War? Evidence from Thirteen Cases. International Organization, 58(01), 35–67. 14 Elbadawi I, Sambanis N. 2000. Why are there so many civil wars in Africa? Understanding and preventing violent conflict. J. Afr. Econ.
9:244–69; Collier P, Hoeffler A. 2002. Onthe incidence of civil war in Africa. J. Confl. Resolut. 46:13– 28; Leonard D, Strauss S. 2003.
Africa’s Stalled Development: International Causes and Cures. Boulder, CO: Lynne Rienner. 15 (M. Ross, 2006), (Collier&Hoeffler 2004), (Fearon & Laitin 2003, Snyder & Bhavnani 2005), (Fearon & Laitin 2003), (Humphreys 2005),
(Le Billon 2005a, Collier&Hoeffler 2005), (Ross 2004b, Humphreys 2005)
Countries with ongoing violent conflict (oil producers to the right)
Source: Ross, 2011
21
with oil and gas – and when the population is less educated.
While onshore fuel rents are strongly correlated with the onset of separatist conflicts, separatist movements are less
likely to claim sovereignty over offshore petroleum than onshore petroleum.
Separatist conflicts linked to oil and minerals include: Morocco, Angola, Burma, the Democratic Republic of Congo,
Indonesia, West Papua, Papua New Guinea, Sudan.
Relevance to Somalia: VERY HIGH (see Sections E.1 and E.2) Timing: SHORT-TERM
Grievances among the local populations
Grievances over insufficiently compensated land expropriation, environmental degradation, inadequate job opportunities,
or labour migration contribute to the initiation of separatist conflicts but play no role in non-separatists wars. For
instance, outbreaks of secessionist conflicts in Bougainville (Papua New Guinea), Aceh (Indonesia) and Southern Sudan
(Sudan) are such cases where politically excluded groups fight to address grievances caused by interregional
inequalities16.
Some suggest that resources are more likely to provoke separatist conflicts if they are extracted through a capital-
intensive process, which offers fewer benefits to local, unskilled workers and more benefits to the state and large
extraction firms. Other studies have implied that local politics around the mine site – including relations between the
extraction firm and local communities – determines whether or not a country’s mineral wealth will lead to violence17.
Relevance to Somalia: VERY HIGH (see Section E.4) Timing: SHORT-TERM
Resource wealth encourages foreign intervention
Natural resource wealth may help trigger conflicts by encouraging interventions from neighbouring powers. For instance,
in Sierra Leone, and the DRC II war, foreign forces (respectively Liberia, and Uganda and Rwanda) decided to support
nascent rebel groups against incumbent governments, in part, to gain access to natural resource wealth.
Relevance to Somalia: HIGH (see Section E.2) Timing: SHORT-TERM /MEDIUM TERM
Pre-emptive repression
In some instances, governments take exceptionally harsh measures against insurgencies, because they appeared to
threaten the government’s control of resource wealth. Multinational companies who operate in politically unstable regions
may seek security for their operations by engaging local military or militia. However, despite their ostensible role as
protectors of a resource, the presence of security forces may actually contribute to the risk of conflict, or lead to
human rights abuses. For instance, it was alleged that members of the Indonesian national military, who had been
recruited by an oil major to provide security for its operations, had committed acts of torture, rape, and murder against
the local population18.
Relevance to Somalia: VERY HIGH (see Section E.4) Timing: SHORT-TERM
16 Banerjee, A. V. and E. Duflo (2003) Inequality and Growth: What Can the Data Say?, NBER Working Paper, No. 7793; Benabou, R.
(2000) Unequal Societies: Income Distribution and the Social Contract. New York University, Economic Research Report, No. 96-17. 17 Ross, M. 2003. Oil, Drugs, and Diamonds: How Do Natural Resources Vary in their Impact on Civil War?” Boulder/London: Lynne
Rienner Publishers; Swanson, P. (2002) Fuelling Conflicts: The Oil Industry and Armed Conflict (Oslo: Fafo AIS). 18 USAID & FESS. 2006. Oil and Gas and Conflict Development Challenges and Policy Approaches.
22
Resource wealth creates “Booty futures”
Resource wealth increases the probability of civil war by enabling rebel groups to sell future exploitation rights to
resources they hope to capture. In Congo Republic, Sierra Leone, and possibly Liberia, rebel groups that had no
resources to sell, but had a chance of securing them in combat, were able to sell future rights to foreign firms or
neighbouring governments. The rebels then used the proceeds to pay soldiers and buy arms, and thus gain the capacity
to capture the promised resource.
Relevance to Somalia: HIGH (security situation) Timing: SHORT-TERM /MEDIUM TERM
Resource wealth helps fund anti-government organisations
Collier and Hoeffler19 note that natural resources are easy targets for rebel predation
since they produce rents and cannot be easily relocated.
It must be noted that this correlation appears only valid for fuel onshore, not offshore.
Offshore oil and gas deposits afford rebel groups fewer extortion opportunities. However,
Somalia may prove to be the exception to this case, given the country’s ‘expertise’ in
maritime piracy.
RIGHT: Number of reported piracy hijacks in Somalia (World Bank)
Relevance to Somalia: VERY HIGH (security situation) Timing: MEDIUM TERM
Resource wealth encourages national conflicts by increasing the value of the state as a target
Governments in resource-rich countries provide more attractive targets than governments in resource-poor countries20.
This link is particularly robust in the case of oil (onshore and offshore), and diamonds. Revenues from these particular
commodities encourage rebel groups to displace the government.
Relevance to Somalia: VERY HIGH (anti-government groups) Timing: MEDIUM TERM
19 Collier, P. and A. Hoeffler (2004) “Greed and Grievance in Civil War”, Oxford Economic Papers, Vol. 56, pp. 563-595. 20 Fearon JD. 2005. Primary commodity exports and civil war. J. Confl. Res. 49:483–507; Le Billon P. 2005. Fuelling War: Natural Re-
sources and Armed Conflicts. New York: Routledge.
23
Resource wealth causes conflict by weakening the state
Middle East scholars have long suggested that states relying on non-tax revenues are too weak to manage the
economy and resolve social conflicts21. Fearon & Laitin (2003) elaborate that oil producers tend to have weaker state
apparatuses, because rulers have less need for a socially intrusive and elaborate bureaucratic system to raise
revenues.
Relevance to Somalia: VERY HIGH (see Section E.1) Timing: MEDIUM TERM/LONG-TERM
Resource wealth lengthens conflict and civil wars
Natural resources might lead to or exacerbate conflict if the resources can be easily looted and transported, or if
access to these resources can be obstructed. For example, a “lootable” resource can be used by opposition groups to
generate revenue and support their movements, while access to an “obstructable” resource can be denied to
government forces, stifling their ability to raise revenues to counter opposition movements22.
UNODC observed that established trafficking routes in the Horn of Africa expand elastically to smuggle or traffic all
manner of illicit goods from people to weapons to illicit drugs. In Somalia local criminal networks, which in some cases
include powerful provincial leaders, armed militia groups, and business elites, are quick to facilitate these kinds of illicit
activities for any product for which a buyer can be found.
Relevance to Somalia: VERY HIGH (security situation) Timing: MEDIUM TERM
Resource rents produce trade shocks
Negative shocks are linked to separatist conflicts23. It is suggested that such shocks foster separatist insurgencies by
producing discontent in the resource-rich region while weakening the state’s finances and its ability to repress dissent
(e.g. Indonesia). Negative shocks are also linked to the fall of authoritarian governments, which could also lead to the
rise of separatism24.
Positive shocks are connected to national conflicts (e.g., Zimbabwe 1972, Argentina 1973, Angola 1975, and Peru 1981)
by making the government a more attractive target for insurgents.
Relevance to Somalia: HIGH (see Sections E.6 and E72) Timing: MEDIUM TERM/LONG-TERM
21 Beblawi H. 1987. The rentier state in the Arab world. In The Rentier State, ed.HBeblawi,G Luciani, pp. 49–62. NewYork: Croom Helm;
Crystal J. 1990. Oil and Politics in the Gulf: Rulers and Merchants in Kuwait and Qatar. New York: Cambridge Univ. Press 22 USAID & FESS. 2006. Oil and Gas and Conflict Development Challenges and Policy Approaches. 23 (e.g., Iraq 1961, Iran 1979, Azerbaijan 1992, Angola 1992, and Russia 1994 and 1999) 24 Przeworski A, Alvarez ME, Cheibub JA, Limongi F. 2000. Democracy and Development: Political Institutions and Well-Being in the World,
1950–1990. New York: Cambridge; Acemoglu et al., unpublished manuscript.
24
C. Somalia’s EI sector: state of play
1. Somalia’s natural resource endowment
There is much hope and speculation around Somalia’s potential
for hydrocarbons and hard minerals. According to some
speculative estimates, the Region of Puntland alone could rank
among the top 20 in terms of oil deposits, and the extent of
offshore oil deposits could be comparable to the resource wealth
of Kuwait25.
However, there is little concrete data to base these hopes on as
no work has been carried out since the civil war began. Such
estimates are mainly based on a combination of old data and
extrapolation of data from neighbouring countries.
Nevertheless, there is a broad consensus that Somalia’s
resources could be on a par with those of Ethiopia, Yemen, Kenya, or other neighbouring countries. During the 1980s,
Somalia was already viewed as a country with vast potential and companies flocked to gather data and explore. This
rush was led by Conoco-Phillips, Shell (Pectin), Amoco, Eni, Total and Texaco, all of whom left the country declaring
“force majeure” when the war broke out.
1.1. Hydrocarbons
1.1.1. Lack of data and asymmetry of information
The key thing to note when assessing the potential for hydrocarbons in Somalia is that data is sparse and is not in the
hands of the government but in that of current and former license holders in Somalia. Therefore one has to rely on
geological literature and extrapolation of existing data in neighbouring countries presenting similar geological constructs.
1.1.2. Promising geological constructs
As early as the 1970s, several geologists demonstrated the promising geology of Somalia. The most promising region
for oil and gas prospecting in Somalia was believed to be the Mesozoic shelf and the reef area around the Somali
embayment and around the Nogal uplift (see map below). Secondary prospective oil and gas regions in Somalia were
believed to be the coastal and offshore marine Tertiary sedimentary rocks which had gas shows26. More exploration in
the 1980s has led scientists to show that most of Somalia has a Jurassic to Miocene sedimentary section that ranges
from two to five km thick and is divided into seven unconformity-or transgression-bounded sequences. This shows that
there are at least eight petroleum basins in Somalia that hold potential prospects ready for exploration and
development. Some of these sedimentary basins have sediment thicknesses more than five kilometres and contain good
source rocks, reservoir rocks, seals and traps necessary for oil and gas to deposit. These basins are:
1. The Lamu Embayment
2. The Mandera Lugh Basin
3. The Somali Coastal Basin
4. The Shabelle Valley sub-basin
25 http://www.theguardian.com/world/2012/feb/25/britain-oil-dash-somalia 26 Barnes, Sydney U. 1976. “Geology and Oil Prospects of Somalia, East Africa.”
25
5. The Mudugh Basin
6. The Nugal Nasin
7. The Almado-Darror Basin
8. The Borama-Bihin/Buban Basin
But beyond these, a major portion of the East African margin of the Indian Ocean is in Somali waters; three out of four
zones27 of the Indian Ocean margin are in, or partly in Somalia:
1. The continental margin bordering northern Mozambique, Tanzania and most of Kenya (up to 2.5 degrees S) has
experienced similar evolution. No part of this margin is in Somalia.
2. The margin of NE Kenya from 2.5 S to 6 degrees N, corresponding to Qallad, a small settlement north of
Hobyo. This margin was formed during the Jurassic (150 – 160 My ago) by rifting and drifting of Madagascar
from Somalia and Kenya.
3. The Northeast sector of Somalia, from 4-5 degrees North to Socotra was formed by the rifting of India and
then drifting away to where India is now. India followed the Owen Fracture and the Chain Ridge.
27 Lowell, J and Wray J in Harms and Brady, “Evaluation of Hydrocarbon Potential of all of Somalia”
26
4. The north Somalia continental margin was formed from the separation of Arabia from Africa. Thus the Gulf of
Aden and the Red Sea were formed.
Offshore operations (deep and super deep) Onshore operations
High financial investments Lower financial investments (if wells not too deep)
Sophisticated technology More conventional technology
Higher risk (technology) High on the ground risk (security)
Requires specific PSAs Usually governed by standard PSA
Requires strong technical and environmental legislation
(marine life protection etc.)
Requires strong technical and environmental legislation
International law typically establishes national ownership
or control of offshore
Mixed models of national ownership or control of
offshore, often decentralised
1.2. Minerals
For the moment there is less interest in Somalia’s hard minerals than in its possible hydrocarbon resources.
Nevertheless, Somalia also presents quite a potential in that area. It is believed that there are untapped and unexploited
deposits which could include gold, anhydrite, bauxite, columbite, copper, feldspar, iron ore, kaolin, quartz, silica sand,
tantalum, thorium, tin and uranium.
Current mining activities in Somalia are essentially at the artisanal and small scale and focus primarily on the
production of non-metallic minerals such as gemstones, salt, sepiolite, gypsum and kaolin.
According to the International Atomic Energy Agency (IAEA), the country has three uranium deposits, with near–surface
uranium concentrations in sediments and soils. Somalia’s deposits are amongst the largest of this type (surficial uranium
deposits) globally28. The country is eligible to receive support from IAEA for improving its nuclear security but it has not
yet taken advantage of this opportunity.
The assessment team received unverified feedback that samples had already been taken out of Somalia, purportedly by
a country that currently had various nuclear related sanction enforcements.
Uranium finds could prove to be a source of wealth, as well as a source for additional destabilisation in the country
and globally.
2. Deals in Somalia’s extractive industries sector
2.1. Pre-1991 legacy
The majors were present and active in Somalia before the war. The 1980s witnessed a growing interest in Somalia’s oil
potential and most of the large oil and gas companies acquired licenses at that time (see map). When the war broke
out in 1991, all companies declared “force majeure” (FM) and this has been active ever since.
28 http://www-pub.iaea.org/MTCD/publications/PDF/te_1629_web.pdf
27
These existing license holders (referred to as the pre-1991
licenses) are the source of a heated debate. On the one hand,
they are still technically license holders until FM is no longer valid.
But on the other hand, if other companies are currently active on
Somali soil, then FM should no longer be considered as
applicable.
The 2008 Petroleum Law grants the right to prior contractors to
convert pre-1991 licenses into authorisations/PSAs on the first
anniversary of them coming into force of the Law. So far, no
licenses have been converted.
Most of the pre-1991 license holders are holding conversations
with FGS. The ones we interviewed agree that licenses need to be
discussed anew but point out that a clear framework for the
sector needs to be put in place.
However, the signing of deals by both FGS and federal states has
led to a perceived souring of relations. This has been
compounded by the fact that some of the new deals encroach on
existing licenses and/or are within disputed territory. We received
unverified information that some pre-1991 license holders had
offered to share geological data with FGS but withdrew these offers when the Soma Oil & Gas deal focusing on data
acquisition was signed. Some have also offered capacity building support, which has not yet been taken on by FGS.
The main issue with these legacy license holders is around the interpretation of FM and whether it is indeed still
applicable. The license holders argue that operating in Somalia right now is impossible given the risk to both assets and
people involved. The new license holders argue that the force majeure process was not clearly defined; that license-
holders did not notify the Government of their conditions for lifting the force majeure and resuming operations; and that
the international legal system is unlikely to accept that licenses are still valid after significantly more than 20 years of
force majeure. The legal experts we consulted are divided on the subject of the validity of these historical deals.
2.2. Current deals
Industry players look at Somalia through a new lens with the prospect of stability and security improved compared to
the past two decades. They see:
increased prospectivity based on past data (former license holders), similar geologic constructs to neighbouring
countries both onshore and offshore
a government willing to put in place a workable framework in which to operate
a possibility of a safer environment in which to operate in the not too distant future
This renewed interest has resulted in signing of new oil deals, the majority of which were concluded over the last 5
years. The companies that have recently entered into deals with FGS, Puntland and Somaliland are minnows, or small,
risk-taking enterprises, seeking first mover advantage (see Section C.1.3).
As a result, Somalia is now torn between its pre-1991 legacy license holders and
the new deals that have been signed by the regional administrations. A summary of
deals is provided in Annex 1.
2.2.1. Federal Government of Somalia
In May 2013 FGS declared that no production sharing agreements would be signed
until a clear framework was in place and urged the federal states to do the same
so that the country could come to an agreement on natural resources.
In July 2013 the Federal Government signed a Seismic Option Agreement (SOA) with
Soma Oil & Gas. The deal was subsequently ratified by the Council of Ministers on 3rd October 2013.
The shifting position of the FGS and the lack a transparent process has provoked significant criticism by Parliament, civil
society, regional authorities and international and national investors, including pre-1991 and current license holders.
FGS’ position is that this deal is not a PSA and does not grant any acreage to Soma Oil & Gas. The company needs
to apply for acreage rights to secure a PSA for blocks that are not held by pre-1991 license holders. Soma Oil & Gas
Soma Oil Deal Specifics
Gathering and digitalising historical seismic data
Acquiring new seismic data (mostly offshore)
Option or right on selected acreage of up to 60,000km
2
for exploration and drilling rights
28
representatives informed the assessment team that negotiations on possible PSA terms were being discussed, should the
company seek to acquire licenses when these are awarded by FGS.
The FGS maintains that the SOA with Soma Oil & Gas is governed by the 2008 Petroleum Law29. The Law (article 31)
obligates the FGS to publish a summary of any authorisations30 granted by the Government within an indeterminate
period of time. To the best of our knowledge, no such summary has been formally made available to the public yet.
Given the controversy this deal has created, we recommend that the summary information required by Law be provided
in the shortest possible term. This would allow FGS to respond to questions and concerns raised by the public and
other stakeholders. For example:
Has Soma Oil & Gas has been granted an option or a right to acquire acreage – and if the latter, what
provisions of the Petroleum Law (2008) does this reconcile with?31
Will historical geo-data be made available to other potential applicants?
What will be the process of granting PSAs?
According to the available information, the contracting process for this deal fully complies with the provisions of the
2008 Petroleum Law: article 15 stipulates that the FGS may elect to award authorisations through direct negotiations
and without inviting applications by public notice – where it is in the public interest to do so32. Nevertheless,
international experience indicates that the public interest is generally better served by a more clearly defined,
competitive and transparent contracting process.
2.2.2. Puntland
Puntland has been awarding exploration licenses since 2005. The first
company to start exploratory activities was Range Resources followed
by Africa Oil. Drilling started in 2012 despite disruptions due to some
of the license being on disputed territory between Somaliland and
Puntland.
Puntland is understood to be pushing for activities to take place
rapidly; first commercial discovery may be made as early as 2016
under Africa Oil contractual obligations. This desire for speed is
based on two factors: first, elections are coming in January 2014, so
the current government needs to demonstrate results; secondly, the
sector takes a long time to bear fruits, so the sooner companies drill,
the sooner they might find something.33
It was also stated that the regional administration is interested in
exploring the mineral potential of this federal state.
2.2.3. Somaliland
From a regional perspective the geology of Somaliland shows many similarities with Yemen and the exploration has
focused on searching for Jurassic rifts where source-rocks have accumulated.
29http://www.hiiraan.com/op4/2013/sept/41218/minister_of_national_resources_responds_to_east_african_energy_forum_comments_
on_soma_oil_gas.aspx 30 ""Authorisation" means a Reconnaissance Authorisation, a Production Sharing Agreement, a Surface Access Authorisation, or
any agreement made by the Government in respect of such an authorisation or agreement." Petroleum Law 2008 31 In the interest of objectivity, we requested FGS and Soma Oil & Gas to clarify this point. The Government informed us that
they are restricted by confidentiality agreements. Soma Oil & Gas provided the following statement: "The Seismic Option
Agreement ("SOA") does involve approval of a Reconnaissance Authorisation which is required to carry out Soma Oil and Gas'
("Soma") seismic work programme. Additionally, beyond the seismic work programme, the SOA allows Soma the right to nominate
and obtain exploration and drilling rights under Production Sharing Agreements for prospective acreage up to 60,000km2." 32 The draft 2013 Law made available to the assessment team retains the same provisions. 33 Interview with the Puntland Minister for Petroleum and Mines
LEFT:
Africa Oil
Corp. &
Range
Resources
Ltd: joint
exploration
interests over
the Nugaal
and Dharoor
Valleys tracts
29
Somaliland has been trying to attract the interest of oil and gas companies for some time and launched its first bid
round in 2009. This did not attract any bidders.
Since then, Somaliland has garnered some interest with small companies like Genel, Ophir Energy, Prime Resources,
Asante Oil and DNO signing agreements with the Ministry of Energy & Minerals. But so far it is understood that only
Genel and DNO have signed Production Sharing Agreements. These are built around the Mining Code that dates back to
1984. Somaliland had to call on international expertise to draft a hydrocarbon law and to provide support in PSA
negotiations.
DNO PSA34
DNO entered into a Production Sharing Contract covering
Block SL-18 onshore Somaliland in April 2013. 100%
paying interest.
Total gross acreage 12,000 km2. DNO holds a 100%
paying interest in the license, while Somaliland holds a
10% carried interest.
GENEL PSA35
Two PSAs covering five blocks. Genel 75% interest and
operator in blocks SL-10B, SL-13 (East Africa Resource
Group 25%). Genel 50% interest and operator in blocks
SL-6, SL-7 and SL-10A (Jacka Resources 30%,
Petrosoma 20%). Total gross acreage 40,300 square km.
Gravity and aeromag acquired and interpreted over the
entire acreage.
Seismic operations have been suspended due to
deterioration in the security environment. Discussions
continue in order to facilitate a resumption of activity
34 DNO website and information from Ministry of Energy Somaliland 35 Genel website and information from Ministry Energy Somaliland
30
D. Somalia’s EI sector: findings, analysis and recommendations
This section lays out the key issues facing governance of the extractives sector in Somalia and our recommended
short-term responses and interventions, categorised by the principles of extractive sector good governance as outlined in
section B.2.3. and are summarised below:
Principle Timing of priority recommendations
Short-term (2014-2016) Medium/long-term (2016 - )
1. Sound political governance
2. Vision, policy and legislation
3. Transparent sector governance
4. Community engagement
5. Sustainable resource extraction
6. Revenue management
7. Equitable economic growth
8. Effective and efficient institutions
Each section will list the following:
Current context, specific to the particular area of governance, including opportunities, issues and risks
Recommendations, including priority and ownership
Next steps – practical first steps to ensure this recommendation can be moved forward immediately
While this analysis and draft recommendations have generally been received favourably by Somali authorities, some
reservations have been expressed in the process of consultations.
In this context it is important to reiterate that the findings and recommendations contained in this needs assessment
are independent and do not represent the views of the governments of Somalia or UK.
31
1. Sound political governance: conflict prevention should be a key consideration for the development of the sector
Current context: opportunities, issues and risks
In Somalia, natural resources have long been a key point of state erosion and conflict, with notable examples of
charcoal, water, fisheries, airspace and land tenure. Control over state resources is equally viewed as a zero-sum
game, creating winners and losers36, an attitude which instigates conflict.
Despite having no proven oil reserves (only 200 billion cubic feet of proven natural gas) and no active hydrocarbon
production, the promise of oil in particular has swiftly become a hotly contested issue. Even at this early stage, the
disputes are not confined to the central versus regional governments, but are equally contentious at the sub-
regional (between Somaliland and Puntland), and community levels. The vast majority of stakeholders consulted are
of the opinion that oil will provoke violent conflict.
As outlined in section C.4.3. above, all links between resources and conflict demonstrated by international
experience exist in the Somali region, and threaten national peace and security in the short- and long term. At
present the sector creates heightened risks of separatist movements, pre-emptive repression, clashes with local
communities, and preconditions for fuelling insurgencies.
Currently there is no consensus on the fundamental issues of resource ownership and revenue sharing (more
below). Federal and regional administrations compete over the right to sign deals and appropriate revenues. This
has resulted in a ‘spaghetti bowl’ of overlapping deals and souring of intrastate relationships. Commercial oil
discovery (potentially in 2016) would increase market demand and exacerbate the situation.
Due to the lack of trust between Somali stakeholders, at present no Somali individual or institution is viewed as
acceptable or legitimate to facilitate necessary dialogue.
If there are any consultations on the fundamentals of the sector, progress is insufficient. Despite the challenges, it
is positive that the majority of Somali players are expressing willingness for a dialogue:
Federal Government: “Production sharing contracts cannot and should not be signed until these issues are
resolved. We can’t do anything until we put our house in order.”
Puntland: “Conversations about revenue-sharing and mandates are part of the Constitutional process.”; “We
all need to know more about revenue sharing so we can have informed discussions and come to an
agreement… If we can’t all learn together, then teach us all separately and make us all sit down…”
Galmudug: “The natural resources in Somalia belong to all Somali people, not only one person, or state.
The constitution is unclear, so every state has its own authority to utilize its natural resource until one
Federal State will be set up.”
Somaliland: “Somaliland needs a solid protocol and agreement with the FGS to move the sector forward.”
In the absence of clarity and agreement on institutional mandates, further and sorely needed technical support for
the development of the sector cannot be properly targeted and designed.
In the current circumstances, all Somali players suffer suboptimal outcomes. At present, neither FGS, nor States are
likely to: 1) secure optimal deals, as companies will factor in the high cost of risk; 2) attract technically and financially
sound companies soon due to the high levels of political and reputation risk; 3) facilitate the execution of unilaterally
signed deals; 4) benefit from shared strategic infrastructure, harmonised fiscal regimes and social investments. Moreover,
any further deals are likely to erode trust and exacerbate conflict.
36 UN-HABITAT. 2008. Land, Property, and Housing in Somalia.
32
Recommendations
1. Short-term support to the sector should be led by considerations for conflict-mitigation.
2. Somali authorities should be supported to undertake a time-bound, inclusive and informed consultative process
addressing oil ownership and revenue sharing. To ensure broad participation, the process needs to be supported and
facilitated by a neutral party with sound technical understanding of the political economy and policy best practice of
resource discoveries and resource management, such as a Technical Advisory Panel staffed by national and
international experts. Technical support and capacity building should be provided to the Federal Government, Federal
Parliament and regional administrations in a coordinated manner. Dialogue should involve non-government players, such
as civil society organisations and community representatives.
3. The establishment of and support to a dedicated resource-sharing sub-committee under the Constitutional Committee
is highly recommended. The consultative process on oil ownership and revenue sharing should inform constitutional
drafting and relevant legislative amendments. The political map process should be re-prioritised to recognise the critical
urgency of jurisdictional and resource-sharing arrangements related to resource management.
4. There are clear indications that further deals that are unilaterally signed by either federal or regional authorities
would impede and devalue a consultative process, spark conflict and produce negative outcomes for all Somalis. At this
stage of Somalia’s political development, it would appear that conducting an informed and consultative process as part
of the broader constitutional conversation envisaged by Somalia’s political roadmap and prior to committing to
commercial agreements, would serve the country’s interests better. This is a concession worth making, as Somalia is
likely to go faster realising the potential of its extractive industries sector by slowing down unilateral initiatives. It is
strongly recommended that all Somali authorities, represented by the Federal Parliament declare a clear ‘no deal’ stance
for the duration of the consultative process.
5. Managing the expectations of Somali constituents, and building the confidence of the international investor community
is extremely important for the future development of the sector. It is recommended that:
the Federal Government commences a proactive communications strategy to manage expectations and tensions,
and first and foremost moves to issue a public statement of intent with regards to the extractive sector, which
communicates a clear plan and timelines for resolution of issues;
the international community issues a joint declaration committing support for the prompt resolution of critical
issues, and for the sustainable development of the sector in the long run.
4. Upon resolution of oil ownership and revenue sharing issues, a dedicated long-term technical support package should
be provided to the relevant authorities.
Priority: VERY HIGH Timing: 2014 Owner: Somali authorities and international
community
Immediate Actions
1. Engage with Somali authorities and development partners to prioritise and refine interventions, and agree timing,
counterparts and ways of working.
2. Design the terms of reference for the Technical Advisory Panel. Finalise specific delivery arrangements as a matter of
priority.
3. Liaise with the Federal Parliament to initiate the establishment of a dedicated resource-sharing sub-committee.
4. Issue public statements with regards to the sector.
Impacts and benefits
1. This is a critical and necessary precursor to all proposed interventions.
33
2. Vision, policy and legislation
2.1. A shared vision for the sector should inform the development of a sector legal framework
Current context: opportunities, issues and risks
The current legal framework governing the sector is contradictory and misaligned, as acknowledged by all Somali
stakeholders consulted.
The Somali Petroleum Law was ratified by the Transitional Federal Parliament in 2008, and is yet to be endorsed
by the Federal Parliament. It vests all powers in the Federal Government, and it does not envisage clear revenue-
sharing provisions between the Federal Government and member states. The Petroleum Law (2008) is contested by
Puntland.
In contrast, the ensuing Provisional Constitution (June 2012) requires a continued negotiated position between FGS
and regional administrations (article 44)37. Furthermore, the Constitution establishes the primacy of State
Constitutions during the process of federating, and excludes management of natural resources from the explicit
remit of the Federal Government38
In essence, this situation reflects the conflicting visions of federal and regional authorities for the management of
the sector, fundamentally revolving around rights management and wealth-sharing. The Federal Government’s position
is that it should protect and manage all depletable natural resources, and distribute proceeds to member states.
Internationally, this allocation of responsibilities is in existence bit is more typical for the management of offshore,
rather than onshore resources.
FGS’ policy stance is reflected in the draft Petroleum Law (2013). It stipulates that powers to grant licenses are
wholly vested in the Federal Government, and breaks the silence on revenue-sharing, proposing that “The Federal
Government will be responsible to ensure that the state's share of Petroleum revenues from within the Territory is
distributed between the Federal Government and Federal Member State governments in a fair manner for the benefit
of the whole country”. The draft legislation envisages that a revenue-sharing formula between FGS and petroleum
producing states be adopted through a separate, dedicated law. Revenue plans for non-petroleum Federal Member
States are to be devised by the Federal Government.
The assessment team was informed that submission to Parliament is imminent, and the Chair of the Parliamentary
Committee on National Resources and Environment envisages its passage within three months of receipt due to its
‘urgency’ and perceived inadequacies of the current law. Potential disagreements over the new legislation or its
misalignment with the Constitution are to be handled through future amendments.
It is encouraging that the Federal Government has given prominence to revenue sharing issues and clarification of
mandates. However, such fundamental issues cannot be viably addressed outside of a constructive dialogue between
FGS and member states. International experience demonstrates that consultations need to be an integral part of the
process.
The ownership of data in another issue which needs to be addressed. Currently there is very little clarity on who
37 “The allocation of the natural resources of the Federal Republic of Somalia shall be negotiated by, and agreed
upon, by the Federal Government and the Federal Member States in accordance with this Constitution”
(Constitution of Somalia, Article 44).
38 “Until such time that all the Federal Member States of Somalia are established and the adopted Federal Member
State Constitutions are harmonized with the Somali Federal Constitution, the Federal Member States existing prior to the
provisional adoption of this Provisional Constitution by a National Constituent Assembly shall retain and exercise powers
endowed by their own State Constitution” (Constitution of Somalia, Article 142.1).
“The allocation of powers and resources shall be negotiated and agreed upon by the Federal Government and the
Federal Member States (pending the formation of Federal Member States), except in matters concerning: (A)
Foreign Affairs; (B) National Defense; (C) Citizenship and Immigration; (D) Monetary Policy, which shall be the
powers and responsibilities of the federal government” (Provisional Constitution of Somalia, Article 54)
34
Current context: opportunities, issues and risks
owns any data relevant to the sector (be it data acquired in the past or date which is to be acquired in the
future).
Federal member states subscribe to a more devolved model of resource management:
Puntland: While Former President Farole considers the
Provisional Constitution "tampered with" and "unlawful,"
article 142.1 provides sufficient grounds to the Puntland
administration to maintain that existing States of Somalia
are mandated to negotiate and enter into production
sharing agreements. Likewise, the Constitution of Puntland
allocates full authority for the management of natural
resources to the State (article 48)39, in line with Puntland’s
Mineral Resources & Petroleum Development Law of March
2008 (not available in English). At our meeting, at the time
President Farole stated that “Until such time that the Somali
Federation is complete and Federal Constitution is ratified in
a national referendum, Puntland reserves the right to
exercise powers endowed by the Puntland Constitution and
enshrined in PFC (refer to Article 208 of the genuine PFC)”.
Puntland does not recognise the 2008 Petroleum Law.
However, it must be noted that Puntland stakeholders
subscribe to a more reconciliatory position with regard to jurisdictional issues. Puntland’s jurisdictional mandate is
disputed by the Federal Government.
Somaliland: The Constitution of Somaliland (2001) states that “The central state is responsible for the natural
resources of the country, and shall take all possible steps to explore and exploit all these resources which are
available in the nation’s land or sea. The protection and the best means of the exploitation of these natural
resources shall be determined by law”. Somaliland does not recognise Somalia’s Petroleum Law (2008) and uses a
modified version of Somalia’s 1984 Mining Code and Regulations, which cover both minerals and hydrocarbons.
Modernising the outdated legislative framework is among the priorities of Somaliland, and a Norwegian company has
been recently recruited to draft a hydrocarbon law. According to a senior government official, Somaliland needs to
engage with the Federal Government of Somalia in order to forge a solid protocol and agreement for the
management of Somaliland’s extractives, as current relations are found
to obstruct sector development.
Galmudug: According to General Abdi Hassan Awale (Qaybdiid),
Galmudug’s Constitution vests the power of natural resource rights
management (offshore and onshore) in the Regional administration. On
this basis, Galmudug is currently conducting negotiations for the award
of an oil prospecting license with the American firm Liberty Petroleum
Corporation. The license area is said to cover a part of offshore blocks
held by Shell. General Qaybdiid is adamant that he would allow no oil
activities on the territory of Galmudug, unless they are sanctioned by his
administration. Galmuduk’s jurisdictional mandate is disputed by the
Federal Government.
Sudan: The root causes of the civil wars were
related to the inequitable sharing of resources.
The various peace agreements were essentially
wealth-sharing agreements.
Indonesia: By reducing revenue inequality, the
government has been able to prevent full-blown
wars. Natural resource revenues were distributed
across regions and fiscal decentralization laws
were adopted.
Nigeria: Grievances over marginalization in the
Niger Delta have been key drivers of civil conflict -
secessionist/separatist, state-community,
community-community, or community-company –
or a combination of all three.
Abridged from (UNDP, 2011)
39 "Puntland natural resources belong to Puntland people and can be exploited in conformity with the Law. The
Puntland State is responsible for the protection and exploitations of the natural resources. The Puntland State may
make agreements with national or foreign companies and give them the exploitation of natural resources"
(Constitution of the Regional Puntland State, Article 48)
Kenya and Somalia: Disputed maritime
boundary
35
Current context: opportunities, issues and risks
Admittedly, these jurisdictional debates extend to other sectors of the Somali economy. They also relate to critical
issues, such as patchy land legislation and unresolved State border disputes:
oil operations in a disputed area between Puntland and Somaliland have sparked conflict;
a maritime boundary with Kenya needs to be agreed once Somalia adopts an Exclusive Economic
Zone allowing it sovereign rights to explore, exploit, conserve and manage natural resources within 200
nautical miles. Kenya maintains that the boundary should run due east from the point at which the
two countries touch on land. Somalia’s position is that the border should continue diagonally
southeast into the ocean, following the border between the two countries on land40.
Recommendations
1. Resolution of jurisdictional and wealth-sharing policies should precede the finalisation and adoption of the amended
Petroleum Law. From an early stage, the formulation of resource legislation should be the subject of extensive
public consultation. Although the Federal Government and Parliament concede in principle on the need for dialogue,
the adopted sequencing of legislating first, and consulting later could prove counter-productive. A rushed passage of
another contested and badly understood Petroleum Law is unlikely to serve any developmental purpose or
constituency, including the extractive industry.
2. Significant technical support should be provided to review and strengthen the draft Petroleum policy and legislation
and its alignment with agreed Constitutional provisions.
3. Provide support to establish a national database system and assistance to manage and develop the data so that
the Somalli Government and relevant institutions can run their own data rooms.
4. Upon resolution of critical issues, support needs to be provided for the development of regulatory frameworks and
procedures in the mid- to long-term.
5. Resolve the EEZ question to enable safe operations in both Somalia and Kenya
Priority: VERY HIGH Timing: 2014-5 Owner: Somali authorities and international
community
Immediate Actions
1. Review the timelines for adoption of the 2013 Draft Petroleum Law.
2. Commit support for consultations and strengthening of Somalia’s petroleum legislative framework through a Technical
Advisory Panel.
40 “It was reported that in 1988, the Somali Ministry of Fisheries and Marine Transportation had drafted a law, the
‘Law of the Somali Sea’ in readiness for the implementation of UNCLOS, which was ratified by Somalia in 1982.
This Law expressly brings Somalia’s maritime claims into general compliance with UNCLOS, but the Law had never
been registered with the UN and hence remained something of a myth until, almost magically, in May 2013 a copy
was discovered in a locked box in the shed of a retired Barré-era judge. This discovery proved that Somalia had
in fact declared an EEZ law in conformity with UNCLOS in 1989, thus superseding a previously non- compliant law,
and the country is now therefore in a position to publish the coordinates for the outer limits of its EEZ
declaration, and negotiate formally with neighbouring maritime states who have overlapping claims. The subsequent
resolution passed by the Somali cabinet on 6 June extends the country’s sea boundaries by 200 nautical miles in
a line projected seawards at right angles to terra firma where the coastal boundaries of Somalia and Kenya meet
If implemented, this resolution will result in an increase of Somali territory by 26,000 square nautical miles (38,000
square kilometres) – an area that encompasses six downstream oil and gas exploration blocks that Kenya has
already sold to various international firms.” (African Affairs Advance Access published September 17, 2013)
36
Impacts and Benefits: Clarity in the legal framework is key to attracting financially and technically capable investors. A
legal framework endorsed by a critical number of Somali stakeholders at the federal and regional levels would mitigate
conflict.
2.2. Issues of nuclear security in the minerals sector should be addressed
Current context: opportunities, issues and risks
The Somali minerals sector is regulated by the outdated 1984 Code and regulations. The need to modernise it
is widely acknowledged by Somali stakeholders but practical steps have not yet been taken. Support should be
provided in the medium-term, as market demand for most – but not all minerals is typically lower than for
fuels.
Currently 11 countries are responsible for 97% of the world’s uranium production. Somalia could potentially join
the ranks of uranium producing nations: according to the International Atomic Energy Agency (IAEA) Somalia
has at least three dormant and large surficial deposits of uranium.
Somalia ratified the Nuclear Non Proliferation Treaty (NPT) in 1970. The NPT is commonly described as having
three main "pillars": non-proliferation, disarmament, and peaceful use.
Despite Somalia’s not being a member state of the IAEA, it was deemed eligible for support under the IAEA-EU
Joint Action Partnership that works to improve and strengthen national nuclear security programmes worldwide.
Priority is given to those States that need to determine what radioactive and nuclear material they have, how
to control it and how to reduce the risk it poses. This does not preclude sovereign states from policy-making
but strengthens:
States’ legislative and regulatory infrastructure related to nuclear and other radioactive material to
enable the country to fulfill its national and international obligations;
Nuclear security measures for nuclear and other radioactive material in use, storage and transport and
their related facilities; and
Capabilities for dealing with such material out of national regulatory control.
As of September 2013, Somalia is one of five countries that are yet to submit comprehensive safeguards
agreements to the Board of Governors for its consideration.
Recommendations
1. Support the Government to develop and implement comprehensive safeguards agreements for the uranium deposits
through IAEA protocols.
Priority: HIGH Timing: 2014 Owner: Somali authorities and international
community
Immediate Actions
1. Liaise with IAEA to assess the support Somalia could receive to deal with nuclear and radioactive material
Impacts and benefits: Positive impact on regional and global security.
37
3. Transparent sector governance: transparency and accountability in the sector need to be ensured as a matter of priority
Current context: opportunities, issues and risks
International experience demonstrates that one of the most vulnerable transaction points throughout the oil and
minerals value chain is the point of contract negotiations and awards. This is so, because contract negotiations
entail three prominent asymmetries (Soros, 2007): asymmetric agency (governments’ accountability becomes
oriented toward the investor); asymmetric information (the sector requires specialised expertise), and asymmetric
bargaining power.
Much can be done to address these asymmetries through strengthening contract negotiation processes and
capacities at the federal and state levels. Where coordinated, this approach reduces competition among
resource-producing regions and thus the provision of unfavourable concessions in order to attract foreign
companies. This is best achieved by adopting a set of shared standards and guidelines for contract
negotiations, agreeing codes of conduct for participating parties, and legislating measures for increased
transparency in contract negotiations. At present neither the Federal Government, not State authorities appear
to have such instruments in place.
The SOA between the Federal Government and UK Soma Oil & Gas awarded through direct negotiations has
raised serious concerns amongst stakeholders, including the industry, about the Government’s commitment to
transparent and fair management of its extractives sector. While the Petroleum Law (2008) allows for direct
negotiations by invitation, the expectations of various stakeholders are that the Federal Government should lead
by example and adhere to international best practice practice.
The Federal Government has stated its commitment to the
Extractive Industry Transparency Initiative (EITI) but is yet to take
practical steps towards implementation. It must be noted that EITI
primarily concerns revenue transparency, and its relevance will
increase when Somalia realises revenues from the sector.
The standards for professional and ethical behaviour of
current resource advisors to the Federal Government remain
unregulated and funding sources undisclosed. To prevent conflict of
interest and maintain objectivity of advice, it is common practice
internationally that Advisors do not accept concurrent assignments
with investors engaged in any form of activities with their client.
However, the international advisor to the Government and chief
negotiator to the Soma deal apparently had a role “to protect all
interests” according to a Soma Oil representative. Another former
adviser to the Federal Government stated that their long-term
services to the Government were provided pro bono, with the hope of later compensation.
As for Somali officials, the Petroleum Law of 2008 envisages restrictions to acquiring oil rights by public officers
(article 10). These legislative provisions could be strengthened with the inclusion of a cooling off period beyond
the date on which the official leaves office.
The situation does appear different at the regional level. According to some sources41, decision making in
Somaliland’s oil sector is closely held amongst key powerbrokers. Sector negotiations reportedly take place
within this small group and are not coordinated with wider government structures. The same source maintains
that control over hydrocarbon deals in Puntland similarly involves a small group at the highest levels around
the former President.
Niger’s constitutional framework
Niger’s constitution of 2010 includes
extraordinary transparency measures for the
natural resource sector.
Among other assurances, Article 150 requires
the publication of natural resource contracts
as well as natural resource revenues on a
disaggregated, company-by-company basis.
Niger has also taken further steps by
adopting a “Charter of Good Governance”.
The Charter was designed through broad
stakeholder involvement and defines
fundamental principles of good governance of
mineral resources.
41 Reitano, T., & Shaw, M. 2013. Peace, Politics and Petroleum in Somalia. African Affairs, 443(2012), 1–10.
38
Current context: opportunities, issues and risks
Currently none of the deals signed by the Federal or regional administrations are being published, and revenue
streams remain undisclosed. The Petroleum Law of 2008 and the draft version of 2013 require publication of
summaries of key terms of all authorisations that the Federal Government enters into, and “regular publication
of all material Petroleum-related payments”. Similarly, the assessment team found no evidence of adequate
contract and revenue transparency arrangements at the regional level.
Recommendations
1. As an emerging oil and mineral producer, Somalia will benefit from the strengthening its national legislation through
strong transparency provisions for open and competitive bidding, contract negotiation and awards, as well as
contract publication and revenue transparency. Publishing contract details in full42 would strengthen the social
contract and would result in more equitable contractual settlements. And finally, this would complement international
initiatives such as the EITI, creating incentives for international companies to adhere to internationally promoted
ethical standards.
2. Support the Somali executive to develop and adopt a “Charter of Good Governance” through broad stakeholder
involvement and defining fundamental principles of good governance of hydrocarbon and mineral resources. Its
provisions should address professional and ethical conduct of international and national advisors.
3. EI transparency should be also addressed through donor support concerned with broader public financial
management issues, and measures to strengthen the civil society sector.
Priority: MEDIUM Timing: 2014-5 Owner: Somali authorities and international
community
Immediate Actions
1. Publish details of all active deals in Somalia’s Extractives Sector
Impacts and benefits: 1. An explicit commitment to transparency will send a strong positive signal to international
investors. Open and competitive bidding should in turn attract high quality market entrants. Transparency in government
deal-making and finances will be a critical mitigating factor to resource-related conflict.
42 Usually with caveats for proprietary information
39
4. Community engagement: social risk associated with the development of the sector needs to be addressed in the short term
Current context: opportunities, issues and risks
Communities and local governments in oil- or mineral- producing regions often feel a particular sense of
entitlement to the benefits that will accrue from an extractives project that is located in their backyard. The
proximity of resources to the community or local government creates a belief that the resources are “owned”
locally and so the local residents should benefit from their extraction.
In Somalia traditional governance structures remain very influential. While oil has not yet been found, localised
conflict in the country has already broken out, highlighting the importance of managing community relations in
a systematic way.
According to Reitano and Shaw39, non-consultative decision making in Puntland exacerbated clan disputes in the
local communities, who felt uninformed about who will benefit from both the oil resources and new industry
investment. In 2006, a conflict between local leaders and the military sent by the regional government to
protect the property and equipment of the contractors and killed more than 30 people and triggered the
creation of a 700-strong militia group.
The Somaliland administration gave exploration rights in parts of Sool and Sanaag to the Norwegian oil
company DNO and the Turkish oil company Genel. Local communities in these regions share kinship and
political ties with Puntland. The Minister of Mines explained that Genel pulled out of Somaliland, because
stakeholder engagements with the local community had not been sufficient - an open letter from the
Somaliland’s Saraar community and diaspora (2013) is provided in Annex 2.This is a lesson which Somaliland
has taken onboard and is now hoping to make social and environmental impact assessments part of their
standard requirements. Norwegian DNO is to start operations and according to the Minister, “They will start with
community engagement, talking to the elders and find out what the local community needs”.
These recent examples demonstrate that governments and industry require a social license to operate achieved
through effective stakeholder engagement, based on active participation of groups affected by sector operations.
Somaliland’s and Puntland’s trial and error approach is unlikely to address group and individual grievances
effectively, and would not sustain expansion in sector operations. Equally, the federal legislative framework and
capacities to mitigate social risks associated with this
industry appear limited.
As outlined above, another inherent risk of EI operations
in unstable regions is linked to provision of security by
private firms to protect operations. By necessity, security
firms hire local forces, arm them and when the project is
over, these forces retain their weapons and need to find
employment elsewhere. This potentially adds a
destabilising force to regions and countries that are
already unstable.
Most companies have no interest in exacerbating
instability or violence, or otherwise becoming caught up
in it, as it imposes a range of additional costs.
Experience shows however, that all too often the corporate sector lacks the skills and experience to avoid
doing so. There are a number of international policy developments that can be advocated in the context of
Somalia, e.g. the Voluntary Principles on Security and Human Rights, or International Alert’s (IA) practical
assessment tool and guidance for conflict-sensitive business practice.
Risk management consultancy providing services
in Somalia:
- The oil and gas companies that I work with are
definitely interested and will press ahead -
regardless of the security situation - the demand
to prepare to go into Somalia is insatiable.
-- Is your company or others looking to deploy
in Somalia with ‘boots on the ground’ the near
future?
- We cannot comment on behalf of the
companies that we serve, but let me say there is
definite momentum building.
Recommendations
1. There isn’t a single best practice that can address every issue arising from the complex relationship between
communities, extractive companies and governments. However, it is becoming more common for countries to
40
rely on regulated models through legislative requirements for community development agreements, and ring-
fencing public revenue for the development of affected communities. This, ultimately, helps in managing
expectations and averting localised conflict. The Somali authorities should be supported to undertake
consultations for benefit-sharing framework with communities and strengthen community provisions in the draft
petroleum legislation.
2. Adopt international standards on business and conflict.
3. Streamline EI-related measures in programmes addressing stabilisation objectives at the community level.
Priority: HIGH Timing: 2014-5 Owner: Somali authorities and international
community
Immediate Actions
1. Raise stakeholders’ awareness of international standards on business and conflict.
Impacts and benefits: Conflict prevention.
41
5. Sustainable resource extraction: the legal framework for environmental protection should be strengthened and implemented
Current context: opportunities, issues and risks
Populations in oil- or mineral- producing regions are exposed to heightened risk of disruption of traditional
livelihood patterns and environmental degradation. Current and draft Somali petroleum legislation does not cater
adequately for environmental protection, the relevant provisions simply state that: “The Federal Government shall
ensure that Petroleum companies protect the environment of the Federal Republic of Somalia, both onshore
and offshore”.
The current institutional set-up tasks the Ministry of National Resources to both develop the EI industry, and
manage its environmental impact, creating an inherent conflict of interest. Additionally, feedback from regional
administrations is that environmental management is not high on their agenda. Given Somalia’s overall track
record in environmental management, strengthening draft legislative provisions is a matter of priority.
Sustainable resource extraction would also require the adoption of sophisticated technical regulations, a task
made even more challenging by Somalia’s deep offshore potential. This issue is not necessarily an urgent
priority and can be addressed in the medium-term.
Recommendations
1. Support Somali authorities to incorporate stronger environmental provisions in the draft petroleum legislation, and
separate responsibilities for environmental management and from those related to sector development.
2. Streamline measures related to EI in broader programming addressing environmental management.
Priority: MEDIUM Timing: 2015-6 Owner: Somali authorities and international
community
Immediate Actions
1. None
Impacts and benefits: 1. Minimisation and mitigation of the negative environmental and social impacts of extractives
projects.
42
6. Revenue management: a number of outstanding issues in the medium-term
Current context: opportunities, issues and risks
As outlined above, clarifying fiscal responsibilities between the federal and state governments, and establishing a
revenue-sharing formula warrants immediate attention.
In the medium-term, the country needs to address a number of outstanding issues related to revenue
management. To unlock the sector to private sector investment, Somalia would need to formulate a royalty
regime for the oil and minerals sectors that is competitive but sufficiently compensates the country for the
depletion of its natural capital base, and responds to the government capacity to administer and enforce the
regime.
In anticipation of receiving revenue from the EI sector, the Somali authorities need to formulate and
communicate a Revenue Management Plan and Fiscal Policy, designed to incorporate conflict reduction effects.
In resource-dependent countries public spending typically goes to consumption, rather than to development. In
such cases, states tend not to provide adequate social services, leading to grievances among the population.
The social contract also breaks down when revenues and expenditures are volatile - a negative income shock
of five percentage points increases the likelihood of conflict by 50% in the following year43, while commodity
booms increase the value of controlling the state.
Recommendations
None in the short term. Medium/long-term in section F.2.2. below.
Priority: HIGH Timing: 2015-6 Owner: Somali authorities and international
community
Immediate Actions
1. As in E1 and E2.
Impacts and benefits: A clear, stable and competitive fiscal regime attracts investors. Revenue management strategies
diversify the economy and prevent conflict.
43 Miguel E., Satyanath S., Sergenti E. Economic Shocks and Civil Conflict: An Instrumental Variables Approach. Journal of Political
Economy 2004;112(4):725, 53.
43
7. Equitable economic growth has a broad significance in the medium/long-term
Current context: opportunities, issues and risks
The ultimate objective of economic development fuelled by extractive sector growth is to move “beyond oil”, rather
than to simply plan for revenue distribution or some degree of value addition. At this pre-discovery stage of
Somalia’s extractive development, this clearly is not a pressing issue but it warrants attention due to its broad
significance for the country’s economic development and conflict prevention
The extractive sector is often referred to as an “enclave,” as it has weak linkages with the remainder of the
domestic economy and the development of the sector often occurs without using domestic capital or with little use
of domestic labour and other production inputs. Potentially countries become locked into a specialisation, exporting
crude oil or unprocessed minerals.
To ensure a stable growth trajectory and job creation, the country would need to develop policies that promote
diversification through labour-intensive production, and stimulate value addition and forward and backward linkages
to the domestic economy.
Recommendations
1. None in the short term. Medium/long-term in section F.2.2. below.
Priority: MEDIUM Timing: 2016-7 Owner: Somali authorities and international
community
Immediate Actions
None.
Impacts and benefits: Enhanced business and employment opportunities. Enhanced national economic growth.
44
8. Effective and efficient institutions: at the heart of the issue is not the abundance of the resources themselves, but how they are governed
Current context: opportunities, issues and risks
Given Somalia’s turbulent history and its limited petroleum and mineral exploration history, any EI programming will
have to work within the constraints of a very limited government institutional framework and low levels of
governance capacity.
At the federal level, the Ministry of National Resources is the policy-making body tasked to deliver the vision for
economically successful minerals and hydrocarbons sectors. The Ministry also oversees agriculture, livestock and
forestry; fishery and marine resources; environment; and water resource management and distribution. This wide
mandate could be changed by the possible expansion of the number of Government ministries announced in the
second half of 2013.
The 2008 Petroleum Law complements the federal institutional framework for the sector with the following bodies:
the Federal Petroleum Authority, which is tasked with sector regulation. The Authority is still not established, and
its functions are currently undertaken by the Ministry and its advisors, the Somalia Petroleum Corporation, and,
reportedly, the President’s office;
at the time of the assessment, the Somalia Petroleum Corporation (SPC) has an appointed Managing Director
but no other staff or assets. According to the Monitoring Report to the UN Security Council, the SPC has set
up an offshore bank account, and is taking a quasi-regulatory role by participating in talks and negotiations
with private companies.
In principle, this is a laudable arrangement that provides required checks and balances. However, certain
provisions44 blur the separation of functions.
The draft Petroleum Law (2013) proposes the establishment of an additional Somalia High Commission on
Petroleum, a 3- to 7- member body that would have decision-making powers with regards to sector policy and
resource sharing with member states. The role of the Ministry of National Resources would be to provide policy
advice to the High Commission. While the proposed amendment demonstrates a timely and positive effort to
address resource sharing issues, the role of the Ministry of National Resources has become less clear.
Finally, the current and draft legislation do not provide institutional provisions for management of geological data,
which is key in encouraging private investment. In the md-term, the country would need to establish a Geological
Survey with a focus on generating and managing regional geo-scientific information. The current and proposed
institutional framework would benefit from an independent review and alignment with international practice in this
regard.
At the regional level, the sector is managed by the Ministry of Energy & Minerals in Somaliland, the Ministry for
Petroleum and Mines in Puntland and Ministry of Fishing and Natural Resources in Galmudug. Due to time
constraints, we were not able to analyse in detail the institutional setup in these member states.
In terms of capacity, a number of immediate and critical problems limit the organisational ability of the Federal
Ministry of National Resources, as outlined in the Ministry Strategic Plan (2013-2016). By the Minister’s account, staff
is severely lacking in capacity and this requires immediate attention. While there are about 300 staff on the
organisational payroll45, an independent review of the Ministry states that “the number of permanent staff and/or
advisers working in the ministry on a daily basis does not exceed five persons”46. Currently there are plans for
44 For instance, “The Government may confer on the Ministry such additional functions in relation to the regulation and
monitoring of Petroleum Operations and, where appropriate, associated matters connected with the functions for the time being
of the Ministry as are appropriate” Article 7.1, Somalia Petroleum Law 2008. Retained in the draft 2013 Petroleum Law. 45 According to the Minister of National Resources 46 Authors’ interview, October 2013.
45
Current context: opportunities, issues and risks
organisational restructuring. The Ministry is supported by some volunteers from the Somali diaspora. We were also
informed that Sudan is providing assistance for short-term technical training.
The regional administrations also experience significant capacity deficits. According to other reviews47 Somaliland’s
public service at ministry and department levels suffers from various endemic problems, e.g. a significant number of
staff who lack the level of basic education expected for the positions held. Somaliland’s Minister of Energy &
Minerals summed the situation up in the following way: “We need everything: expertise, experience, attorneys…”.
Similarly, the Joint Needs Assessment Rule of Law report (ref) noted that the majority of civil servants in Puntland
“have no university or secondary education.” According to company operating in Puntland, the capacity of the
regional Petroleum and Minerals Agency is limited. Some corporate license holders have sponsored capacity building
activities for government staff.
At a technical level, the development of an EI sector presents formidable challenges – it is technologically difficult,
and environmentally and socially impactful. With a legacy of conflict and statelessness, it is hardly surprising that
the Somali authorities are at present ill-prepared to manage the sector well. Human capacity deficits are matched
by an insufficiently developed institutional set-up. The needs for technical assistance are significant and immediate.
However, lack of clarity about the roles and responsibilities of federal and state institutions is a significant obstacle
to determining where and what capacities are needed most.
Recommendations
1. Support the timely resolution of jurisdictional and wealth-sharing issues through a Technical Advisory Panel.
2. Support the Somali legislature and executive to undertake a review of the current and proposed institutional
set-up and strengthen relevant provisions in the draft petroleum legislation.
3. Commit to long-term capacity development support once jurisdictional issues are resolved. This would address
capacity requirements in several governance areas, including but not limited to the following:
Key policy aspects, including licensing, negotiations, fiscal, environmental, social, regulatory
Investment promotion
Management and leadership
Organisation design and development
Communications & community engagement
Compliance and inspection
Tax policy and administration
Long-term revenue management
See PROGRAMME 2 further below for more details.
Priority: V HIGH Timing: 2014-6 Owner: Somali authorities and international
community
Immediate Actions
1. Design the terms of reference for the Technical Advisory Panel and implement the support programme
Impacts and benefits: 1 Efficient, effective, and diligent management, regulation and development of the extractive
industries.
2. Mitigation of key risks, and avoidance of deterioration of security.
3. Optimisation of resource development outcomes, including sustainable economic growth, job creation, and government
revenue mobilisation.
47 UN-HABITAT. (2008). Land, Property, and Housing in Somalia.
46
E. The way forward
1. Options considered
In line with our terms of reference, we propose a number of options for consideration.
1.1. Option 1 (Rejected): Do nothing
The obstacles to the development of Somalia’s EI sector are at the heart of Somalia’s wider state-formation and
governance conundrum. Given competing agendas for donor support and the complexity of the sector, refraining
from action is a strategy largely followed by the international community at present. Current and planned donor
assistance to the sector is fairly limited and fragmented, as summarised below:
Donor Current assistance (December 2013) Planned assistance
to FGS to member states to FGS to member states
UK DFID Needs assessment
AfDB Legal support
USA Advisor
WB Policy note A series of workshops on EI sector
management with a focus on PFM
Mediation effort on agreement of
ownership, control and revenue distribution
of oil and gas resources
Sudan Technical training
Other programmes supporting the processes of federating, constitutional development, and public sector
governance and accountability could incrementally create the necessary foundations for the development of a
vibrant EI sector in the future. The following programmes and initiatives are broadly relevant to this sector:
UN: support to the political map process; Somalia and Eritrea Monitoring Report
AfDB: planned review of infrastructure
DFID: planned support to civil society
Multi-donor: Somalia Stability Fund and planned support to PFM
Finally, doing nothing has the added benefit of mitigating reputation risk and reducing suspicions of donors’
commercial interest associated with this sector.
However, inaction might turn into a very high risk strategy that could devalue all stabilisation and developmental
efforts in the country for the following reasons:
The adoption of an amended Petroleum Law in 2014 without extensive consultations is likely to push the FGS and
regional member states further apart.
A potential commercial discovery in 2016 will create strong incentives for more unilaterally awarded deals.
As outlined in the context setting and analytical sections of this needs assessment, these factors are strongly
associated with a heightened risk of violent conflict and potential secessionist wars.
Option 1 was discarded due to the associated high levels of risk.
47
1.2. Option 2 (Rejected): Provide capacity building and technical assistance package to the
relevant Federal institutions
This section broadly reflects priorities and preferred approach outlined by the Ministry of National Resources. Its
strong focus on technical assistance will help to address the significant gaps in the Federal policy and regulatory
regime, and advance the Federal government’s vision for the institutional set-up of the sector.
Suggested activities and areas for support include:
Assist the formulation of a comprehensive strategy for MNR and support capacity development for MNR employees.
Support an MNR-led consultative process with Parliament, regional authorities and other stakeholders for the
finalisation of the Petroleum Law.
Support the development of a regulatory regime for the EI sector and help resolve the issues of existing
production sharing agreements signed by regional administrations.
Prepare an institutional development strategy to operationalize policy-making and regulatory bodies, the State Oil
Corporation and ensure good stewardship of geological data.
This option has a number of benefits, such as strong buy-in, clear counter-parting, easy coordination and a focus
on technical interventions. However, on its own this is a high risk strategy, which may attempt to force technical
solutions onto unresolved political problems. The risks associated with this approach include:
International development partners are perceived as biased and taking sides in a complex situation.
Existing and interim regional administrations refuse to participate.
This fails to address the key underlying issues, and may exacerbate the risk of intrastate conflict.
Option 2 was discarded due to the associated high levels of risk.
1.3. Option 3 (Recommended): Provide comprehensive, flexible and sequenced support to a)
facilitate resolution of critical issues, b) address priority technical areas and c) support
institutional capacity building
It is critical and urgent to the development of Somalia’s EI sector, and to the avoidance of conflict in the Somali
region, that a process is initiated that immediately begins to move federal, regional and clan representatives
towards a point at which they can agree on the questions of resource ownership and revenue sharing. This can
be achieved only through a process based on dialogue, trust and increasing recognition of mutual benefit.
It is the opinion of the assessment team and many of the consulted stakeholders that the international community
can play a crucial and possibly game-changing role here if it can establish a mechanism that takes the time to
develop trust-based personal relationships with each of the key institutions/individuals involved. This trust can only
be built through individuals spending time together, and this can be delivered through those individuals providing
sound, credible, beneficial and objective technical advice.
The Option 3 approach presented below is strongly advised due to the need for a balanced, representative and
consolidated effort led by the common goals of federating and constitutional ratification. This option envisages
provision of two support programmes, which would not start simultaneously but could be staggered as follows:
PROGRAMME 1: Immediate and time bound assistance through the establishment of an Advisory Technical Panel
tasked with provision of technical support and institutional capacity building around the issues of resource
ownership and revenue-sharing, and facilitation of an inclusive consultative process between Federal and Member
State authorities to resolve these issues.
National and international experts with relevant experience would form the Advisory Technical Panel, and are to
be made available to the Federal Government, Federal Parliament, and Federal Member States. Alignment with the
Constitutional process and the process of legislative drafting is key.
Support the drafting of the Petroleum Law at Federal and Regional level to start the dialogue process and
48
support the development of much-needed legislation. The programme could also support capacity building efforts
and mediation efforts on resource sharing (in line with other development agency programmes)
It is recommended that issues associated with nuclear safety are also addressed in this timeframe.
PROGRAMME 2: Long-term and significant technical support provided upon resolution of resource ownership and
revenue-sharing arrangements under Programme 1. The recipients of this programme will be determined during the
first stage of support, when institutional mandates are to be clarified.
The recommended staged approach is incentive-compatible: it provides a roadmap for realising benefits from the EI
sector, and provision of support to all key influencers. More details are provided below.
49
2. Key components of recommended assistance
2.1. PROGRAMME 1: Set up an Extractives Technical Advisory Panel of international and national
experts
Suggested activities:
1. Design and embed a dedicated panel of independent experts within key federal and regional institutions - the
Federal Government, the Federal Parliament, and regional authorities - formed or forming. The panel’s role is
double-edged – to provide independent technical advice, and to act as a trust-based mediating mechanism to
resolve differences between institutions. Assistance would be divided into a number of thematic streams which could
be opted in or out of, although participation in all streams would be highly recommended;
2. It is strongly recommended that all Somali authorities, represented by the Federal Parliament declare a clear ‘no
deal’ stance (on commercial terms) for the duration of the consultative process or until fundamental resource
sharing issues have been addressed.
3. Provide immediate technical assistance to the Federal Government and the Regional Administrations on drafting
appropriate Petroleum Legislation to govern the sector. This cannot be fully disassociated from the issue of
resource ownership but should the World Bank provide immediate assistance on this issue, then support on all
other aspects of the legislation could be given immediately to the Federal Government and the Regional
Administrations;
4. Firm up Somali political agreements through sector legislation. Support a consultative process for a review of the
current and proposed legislative framework, and assist Somali authorities to strengthen the draft Petroleum Law in
terms of property rights, transparency provisions, institutional framework, rules of unitisation, pre-1991 legacy,
environmental and social requirements etc.
5. Support the development of a governance and accountability framework through the sector legislation, as well as
formulation and adoption of a Charter of Good EI Governance and codes of conduct for Government, corporate
sector and development partners.
6. Raise counterparts’ understanding of critical sector issues, the benefits of a coordinated approach to sector
development as well as awareness of international approaches to jurisdictional and revenue-sharing arrangements.
Activities include direct support, an extractive industries governance fundamentals training course, study tours and
others;
7. Mediate discussions and consultations about ownership and allocation of resource wealth in Somalia amongst
federal and state authorities, clan representatives and CSOs.
a potential entry point could be the development of deep offshore, as its conflict profile is lower, there are
fewer legacies and the economic promise could be used to incentivise political settlements of jurisdictional
issues.
8. Align EI sector issues with, and prioritise within the political map/constitutional process;
An Extractives Sub-Committee established under the Parliamentary Constitutional Committee comprising
members of the Constitutional and National Resource Committees;
9. Coordinate and liaise with other donor initiatives related to the governance of the EI sector – in PFM, accountability,
community development and stabilisation.
10. Provide immediate and dedicated support to the Federal Government and Federal Parliament to develop and
implement comprehensive safeguards agreements for its uranium deposits, including: re-ratification of the NPT if
deemed necessary; joining the IAEA; development of comprehensive safeguards, and ensuring that known deposits
are protected.
11. Support the design of long-term technical assistance packages to Federal and Regional Administrations, to be
provided upon satisfactory resolution of issues above
50
Suggested modalities:
1. Provide patient and committed support to an inclusive political process: PSG1 of the Somali Compact states that
“the FGS will initiate dialogue with these administrations and federal states to address critical issues: fiscal
federalism and natural resource management; the role, functions and scope of the various administrations (political
decentralization); and structure, mandate and deployment of various parts of the security sector”. In our view, this
should take absolute priority above any other technical work and the process needs to take into consideration the
views of a cross-cutting sample of Somali society, including community/clan elders, civil society groups and Somali
intellectuals.
2. The Federal Government would chair the process to agree the model for sector management and revenue sharing
with the different work streams being led by the appropriate international technical advisors. All support will be
provided in equal measure to the Federal Government and the Regional Administrations.
3. Equitable provision of support: Assistance should be extended to all players who have, or might have a say in the
development of the sector. Currently, there are strong perceptions that a disproportionate share of donor resources
is invested in the Federal Government, and that the international community gives a silent nod to unconstitutional
deals (e.g. Puntland).
4. Transparent and neutral provision of support: A number of Somali stakeholders recommended that donors step in
to mediate a political dialogue on natural resource management. However, with active international corporate players
in the mix, there is a strong perception that bilateral donors are driven by self-interest and promote their domestic
commercial interests above any other. Due to their relative neutrality, multilateral agencies or multi-agency
modalities are best placed to mediate, promote and advance the necessary dialogue. Note that regardless of which
modality is preferred, it is important to again emphasise that expediency is critically important.
5. Aligned support: at this stage of Somalia’s development, the conflict potential of the sector far outweighs its
developmental potential. With stakes so high, contradictory messaging from the international community and ad hoc
provision of support could exacerbate, rather than mitigate risk.
6. The trust-building process is critical to this mechanism, and to facilitate this, a dedicated panel expert needs to be
allocated to each key institution with a dedicated counterpart at a senior level, and a direct relationship with the
head of the institution (e.g. Minister, President). Panel experts thus need to be individuals with the experience,
credibility, professionalism, integrity and interpersonal skills required to develop strong professional and personal
relationships, while maintaining impartiality. The individuals also need to be committed to this process, and available
in the region most of the time.
7. The panel needs to contain at least 2 experts on the relationship between extractive industries and conflict who will
focus on developing and operating a Somali conflict-monitoring and -prevention framework in collaboration with
federal, state and community institutions.
Risks and mitigation measures:
1. Lack of mutual trust. Mitigated through provision of a mediating mechanism that is recognised as independent and
neutral.
2. Political and economic demands to reap the rewards of the Somali extractive sector fast. Mitigation measures
include: share best practice on sector timelines; raise awareness of the benefits from a coordinated approach to
the sector, and commit to long-term technical support once key issues are resolved.
3. Suspicion of international motivations. Mitigation measures include: provide support through multilateral/multi-agency
channels. Introduce and communicate governance arrangements for federal and state governments, as well as
international and national advisors.
4. High expectations of Somali constituents. Mitigation measures include: develop and communicate a public statement
of intent with regards to the extractive sector.
5. Low confidence levels of the international investor community. Mitigation measures include: the Somali authorities
issue a public statement of intent with regards to the extractive sector, which communicates a clear plan and
timelines for resolution of issues, and declare a clear ‘no deal’ stance for a time-bound period. The international
51
community issues a joint declaration committing support for the prompt resolution of critical issues, and for the
sustainable development of the sector in the long run.
6. Hesitant and conflicting messages and uncoordinated and fragmented support from the international community.
Mitigation measures include: prioritise EI jurisdictional issues in the political map process; develop and communicate
a joint position as suggested above; ensure support is equally balanced between federal and state authorities, and
that this is clearly communicated and perceived.
7. Risk of building up individual capacity versus institutional capacity. Mitigation measures include: focusing on building
up institutional capacity and legislation to avoid individuals benefiting from capacity building leaving.
Priority: Timing:
VERY HIGH. First discovery may become a fact by 2016. It is thus critical and urgent to the
development of Somalia’s extractive industries, and to the avoidance of conflict in the Somali
region, that a process is initiated that rapidly begins to move federal, regional and clan
representatives towards a point at which they can agree on the questions of resource
ownership and revenue sharing. This can be achieved only through a process based on
dialogue, trust and increasing recognition of mutual benefit.
2014- 2015
Impacts and benefits:
Mitigation of violent conflict and setting up the right foundations for a sector, the medium and long term economic
development potential of which is likely greater than any other sector in Somalia’s economy.
Suggested next steps: Status:
Engage with the Federal Government and Regional Administrations to obtain feedback on the
recommendations and secure buy-in on suggested way forward. These sessions were
conducted in February-March 2014. The assessment team engaged, amongst others, with:
HE Minister Daud Mohamed Omar (FGS Minister forMineral Resources)
HE Adbiweli Ali of Puntland
Harbi Kullane, Senior Advisor to the President of Galamadug
HE Minister Hussein Duale of Somaliland
Completed
Liaise with the Somalia Donor Working Group to assess current synergies with new donor
programmes and ensure complementarity (for instance possible World Bank aimed at mediating
an agreement of ownership, control and revenue distribution of oil and gas resources)
Ongoing
Design the terms of reference for the suggested Advisory Panel and start design phase:
- Set up list of institutions targeted for support (Federal Government, Regional
Administrations)
- Assess the gaps / urgent needs (expected focus on Petroleum and Mining Legislation)
- Assess the skills and expertise required from panel advisors
- Set up an advisory committee to approve and review the design, chaired by FGS with
equal representation from Regional Administrations (and mechanism to accommodate
new regions as they form)
To do
52
2.2. PROGRAMME 2: Provide long-term and significant technical support
Key activities:
The ownership of the proposed programmes below will be determined during the first stage of support, when
institutional mandates are clarified. Given the magnitude of demand, required assistance is organised thematically:
1.1. Effective institutions (short term)
Support the development of a resourced, time-bound plan for sector institutional development
Provide institution building and capacity development support to emerging policy and regulatory bodies, and
the national petroleum corporation
Support the establishment of a Somali Geological Survey and Petroleum Corporation
1.2. Vision, policy and legislation (short term)
Support the formulation of a vision and strategy for the development of the EI sector in Somalia
Assist with the development of Petroleum regulations
Assist with the development of minerals sector policy, a Minerals Law and Minerals Regulations
Support review of licenses and negotiations with license holders
Support the establishment of standards for geo-data management and consolidation of geological information
1.3. Revenue management (short term)
Support the formulation of petroleum and minerals fiscal regimes
Assist with the formulation of a Revenue Expenditure Policy
1.4. Transparency (short term)
Support the development and adoption of procedures for open and competitive bidding and contract
negotiation
Support international initiatives such as the EITI and Publish What You Pay
Assist with the establishment of an independent facility for monitoring of contract negotiations
Support the development and adoption of regulations or procedures for contract management and revenue
collection
1.5. Economic development (medium term)
Provide support to develop a strategy for development of shared infrastructure (resource corridors)
Assist with the formulation of a skills development strategy
Provide support to formulate a strategy for economic diversification
1.6. Sustainable resource extraction (short term)
Provide support to develop an environmental management legal and regulatory framework for the sector
Provide support to develop and adopt relevant technical regulations and guidelines.
1.7. Communities: mitigate social risk (short term)
Support consultations for benefit-sharing framework with communities
Provide assistance to develop corporate guidelines and procedures for community consultations
Provide support to undertake a Strategic Environmental and Social Assessment
Priority: Start: Duration:
HIGH Upon resolution of ownership
and revenue issues
(target Q4 2014)
3-5 years.
53
3. Consultations held around the report’s recommendations
Following the needs assessment stakeholder engagements between September 2013 and November 2013, the team
presented its findings to a number of stakeholders in order to receive feedback on the conclusions and the suggested
way forward. The feedback received was integrated into this final report.
The presentation used to received feedback is attached as a
Audience Location / date
Federal Government of Somalia
represented by the Minister for
National Resources and Dr
Haider
Mogadishu, 26th November
2013
Working Group on Somalia
(International Community)
Nairobi, 28th November
2013
Government of Galmadug
represented by Harbi Kullane
Nairobi, 10th February 2014
Somaliland Government
represented by Minister Hussein
Duale
Hargeysa, 23rd February
2014
Puntland Government represented
by President Adbdiweli
Addis Abbaba, 25th February
2014
Federal Government of Somalia
represented by the Minister of
Minerals and Petroleum, Dr
Haider, the Director for the Office
of the Minister of Minerals and
Petroleum and J. Jay Park
Nairobi, 10th and 11th March
2014
54
F. Annexes
Annexe 1 - Summary: deals in Somalia’s EI sector
Authority/Location Company & interest Details
Ministry of National resources
Federal Government of Somalia
Soma Oil & Gas, Seismic
Options Agreement
Signed in July 2013.
Gathering and digitalising historical seismic
data
Acquiring new seismic data (mostly offshore)
Option on selected acreage of up to
60,000km2 for exploration and drilling rights
Puntland Petroleum and Mineral
Agency
Africa Oil Corp. (AOC) & Range
Resources Ltd: joint exploration
interests over the Nugaal and
Dharoor Valleys tracts (onshore)
PSAs granted in 2006.
PSAs amended in 2009.
FGS does not recognise the agreements.
Somaliland Ministry of Energy &
Minerals
Ophir Energy, Prime Resources
and Asante Oil: exploration and
seismic
Overlaps with pre-1991 license holders
Conoco and Chevron.
FGS does not recognise the agreements.
Somaliland Ministry of Energy &
Minerals
Genel Energy Plc (50%)
exploration agreement (onshore)
Jacka (15%)
Sterling (25%)
Petrosoma (10%)
Granted in August 2012.
Pulled out in September 2013 due to “a
deterioration in the security environment48”.
FGS does not recognise the agreement.
Regional Government of
Galmudug
Liberty Oil 2013: signed for a block
Contested by Shell as previous license holder
Unrecognised by FGS
Somaliland Ministry of Energy &
Minerals
DNO: production sharing
contract onshore
10% held by the Somaliland
government through a carry
agreement.
Granted in April 2013.
Situated in the Nugaal Basin and in territory
disputed by the Khaatumo State of Somalia.
Unrecognised by FGS
Puntland Petroleum and Mineral
Agency
Horn (Operator) 60%
Range Resources 20%
Red Emperor 20%
Dharoor Valley Exploration Area
and the Nugaal Valley
Exploration Area
2007: Production Sharing Agreements and
Joint Operating Agreements acquiring an 80%
interest in licenses covering the Dharoor
Valley and Nugaal Valley Blocks.
2009: amended PSA (expiry period extended
to January 2011)
2011: amended PSA to expire January 2012
2011: new amendments to PSA with
48 Genel website
55
Authority/Location Company & interest Details
agreement to pay the Puntland State of
Somalia $1 million in infrastructure and
development support fees.
May 2013: new PSAs which carry a
commitment to drill one well in each block
within an additional three year term ending
October 2015.
Blocks are situated in contested areas by
Somaliland. The contract is not recognised by
FGS
Government of the Somali
Democratic Republic
Royal Dutch Shell (50%)
Exxon Mobil (50%)
(offshore)
1988: Pecten awarded a 14.9 million acre
block and started seismic operations.
1990: Exxon farm-in
1991: declared force majeure
Government of the Somali
Democratic Republic
Chevron
(onshore and offshore)
1986: oil exploration agreement for a three-
block area in the Guban area of northern
Somalia.
Planned for 2 years of geological surveys
1991: declared force majeure
Government of the Somali
Democratic Republic
Conoco
(onshore)
1986: oil exploration agreement for Nogal,
Sool and Togdher regions
1991: declared force majeure
Government of the Somali
Democratic Republic
Amoco (now BP)
(onshore)
1987: Blocks 6, 9, and 12, north and
southwest of Mogadishu.
1991: declared force majeure
Government of the Somali
Democratic Republic
Eni
(onshore)
1986: signed exploration agreement for block
12 in the Puntland area, in the Sagaleh and
Somali basins
1991: declared force majeure
56
Annexe 2 - Open letter from the Somaliland’s Saraar community and diaspora (2013)
“We, the undersigned, are members of the Yonis Abdirahman clan, the overwhelming inhabitants of Saraar region
in Somaliland, where Genel Energy has embarked on oil exploration.
As you know, Somaliland seceded from Somalia and declared its independence in May 1991 after the fall of the
government of the late dictator, Mohammed Siad Barre. Since the declaration of its independence, successive
democratically elected governments, traditional elders, religious leaders, intellectuals and ordinary citizens have
worked together to achieve peace and stability in Somaliland.
This impressive achievement has eluded Somalia despite enormous economic, political, military, and diplomatic
support by the international community for more than 20 years.
Now, Genel Energy risks the stability of our region through poorly planned exploration activities. Genel Energy and
a few short-sighted ministers in the Silanyo government have put this well- earned, cherished peace in jeopardy.
We in the diaspora, and the inhabitants in Saraar, who make a living from livestock, are not against oil exploration
in the country. We recognize that the people of Somaliland are in dire need of economic development. We
welcome oil companies to invest in the country to create jobs, to build infrastructure, to provide social services,
which the people desperately need.
We will not, however, support any company that does not take into account the needs and interests of the
indigenous people in the designated areas for oil exploration. We oppose those who do not consult our chosen
traditional elders, intellectuals, religious leaders, and members of Parliament of the Saraar region.
In March of 2013, our people, led by a selected committee of 21 elders, vehemently protested and stopped the
initial stages of the exploration by Genel Energy and the Silanyo government. Both parties failed to properly
consult the inhabitants of the region.
In April of 2013, the committee met in Ainabo, Somaliland with two high-ranking Genel Energy executives, including
the country manager, Mr. Ibrahim Mohamed Hassan. After a lengthy and friendly discussion, they presented a list
of goals representing the reasonable needs of their people to the executives. The elders reiterated that a
collaborative effort was necessary, and that Genel Energy should consult with them prior to resuming any oil
exploration. The Genel Energy executives warmly accepted the list and promised to seriously consider it and to
respond in due time.
Although the elders never heard from Genel Energy, operations were suspended for the next three months.
In June 2013, the elders met with President Ahmed Mohammed Mohamoud (Silanyo). The President graciously
listened to their complaints, and acknowledged that the people of Saraar were not properly consulted by Genel
Energy and his government. The President asked them to select five members to negotiate with Genel Energy and
Mr. Hussein Abdi Dualeh, the Minister of Energy and Minerals. The President further assured the elders that no
work of any kind would be done during the negotiations.
In July 2013, the selected five members along with Mr. Mohammed Ahmed Jama Sahar, a native of Saraar, who
holds a PhD in Chemical Engineering, met with the Minister of Energy and Minerals and Genel Energy.
Unfortunately, negotiations failed because both the Minister and the Genel Energy manager refused to make any
substantive concessions. Meanwhile, Genel Energy blatantly violated President Silanyo’s order of suspending all
operations during the negotiations.
The inhabitants will not agree to the resumption of oil exploration unless they are properly consulted. The
following list of reasonable demands was presented to Genel Energy and the Silanyo government:
1. A thorough environmental study must be undertaken;
57
2. Sufficient funds must be set aside for the people whose lives will be severely impacted by the oil exploration; 3.
Security of the Saraar area should be the responsibility of the local people;
4. The 25% ownership of interest, which was wrongly awarded to the East African Group, an unknown entity
registered in the Isle of Man, must be reversed and instead granted to the Saraar inhabitants;
5. All agreements between the Silanyo government and Genel Energy must be released to the Parliament and the
House of Elders for debate and approval.
We hereby appeal to you and the Board of Directors of Genel Energy to seriously consider these important
matters. We would earnestly welcome a win-win outcome for all: Genel Energy and its stockholders, the
government, the Saraar people and all the citizens of Somaliland.
We trust that Genel Energy will make serious efforts to achieve cooperation and success in the Saraar region and
elsewhere in the country.”
58
Annexe 3 - List of stakeholders consulted
The team is grateful to the stakeholders consulted.
Organisation Name Position
African Development Bank Richard Walker
African Development Bank Abraham Mwenda
Africa Oil Alex Budden VP External Relations
AMSAS Consulting Dr Ali Abdulahi Chief Executive Officer
Conflict Dynamics Paul Simkin Director
DFID Chris Carter Private Sector Development Advisor
DFID Somalia Adhan H. Haji Private Sector Development & Growth Advisor
DFID Somalia Paul Macharia Programme Officer
DFID Somalia Silas Malemo Programme Assistant
DFID Somalia Richard Nash Governance Adviser
DFID Rowan Yamanaka Economist
DFID Nikolai Hutchinson
Dutch Embassy Rogier Nouwen Senior Policy Officer
East Africa Energy Forum Abdillahi Mohamud, Director
East Africa Energy Forum Feysal Mayow Director
East Africa Energy Forum Said Mohamed Director
European Union Anna Schmidt
EUNAVFOR Styn Janssen
Foreign and Commonwealth Office Grant Calder Second Secretary (Political), British Office for Somalia
Federal Government of Somalia Abdirizak Omar Mohamed Minister of National Resources (MoNR) until January
2014
Federal Government of Somalia Daud Mohamed Omar Minister forMineral Resources,(MoNR) as of January
2014
Federal Government of Somalia Mohamoud Hassan
Suleiman (Awil)
Minister of Finance & Planning
Federal Government of Somalia Dr Abdullahi Haider Senior Advisor to the President on Petroleum and
Mineral Resources and to the Ministry of National
Resources
Federal Government of Somalia Saida Hassan Osman Deputy Minister of National Resources
Federal Government of Somalia Dr Farah A. Hassan
“Kurweyne”
Director General, Ministry for Mineral Resources
National Resources
59
Organisation Name Position
French Embassy Emmanuel Besnier Conseiller – Somalia Affairs
Galmadug President Col. Mohamed Ahmed Alin ‘Qabdeed’
Galmadug Harbi Senior Advisor to the President
Global Witness Barnarby Place Oil team
Global Witness Dana Wilkins Policy Advisor
Government of Puntland President Adiweli President elect as of January 2014
Government of Puntland Former President
Abdirahman M. Farole
President (until January 2014)
Government of Puntland Farah Ali Jama Minister of Finance
Government of Puntland Yusuf Hassan Senior Assistant to Former President Farole
Government of Puntland Issa Farah Minister for Natural Resources
Government of Puntland Alibare Jama, Advisor
Government of Somaliland Ms Shukri Haji Ismail
Bandare
Minster for Environment
Government of Somaliland Hussein Abdi Dualeh Minister for Energy & Minerals
Government of Somaliland Dr Mohamed Abdilahi Omar Ministry of Commerce and International Investments
Hanvard Africa Hassan Noor Chief Executive Officer
Heritage Institute for Policy
Studies
Abdi Aynte Executive Director
Jubaland Interim Administration Professor Gandi Advisor to the Jubaland Interim Administration
Jubaland Interim Administration Prof. Abdirizack ‘Fartaag’ Advisor to the Jubaland Interim Administration
Norwegian Embassy Jan-Petter Holtedahl Counsellor (Somali Affairs)
Parliament Abdulkadir Aden Nur Chair, Natural Resources Committee
Private Security Provider
Qatari Embassy Mr Mansour Commercial attaché
Royal Dutch Shell Steven Schofield Government Relations, Shell International
Salama Fikira Conrad Thorpe CEO
Shell International Steven Schofield UK Government Relations
Soma Oil Robert Sheppard CEO
Somalia Eritrea Monitoring Group
(SEMG)
Jarat Chopra Coordinator
Somalia Eritrea Monitoring Group
(SEMG)
Dinesh Mahtani Advisor
Somaliland Chamber of Mohamed Shukri Jama Chairman
60
Organisation Name Position
Commerce
Somaliland Chamber of
Commerce
Ibrahim Ismail Elmi Secretary General
Somaliland Justice & Welfare
Party (JWP)
Faisal Ali Waraabe Chairman
Total Emmanuel Thomazo New Business Development
U.S. State Department Julie Limoges Economic / Commercial Officer
UN Assistance Mission in Somalia Tariq Chaudhry Governance Team
UN Assistance Mission in Somalia Rania Dagash Governance Team
UNDP Philippe Lazzarini UN Resident Coordinator and UNDP Resident
Representative
World Bank Hugh Riddell Global Hub
World Bank Lex Huurdeman Senior Petroleum Specialist
World Bank Matthias Mayr
World Bank Paolo Zacchia
n/a Asha-kin Duale Constitutional Advisor
n/a Patrick Molliere Petroleum Advisor
n/a Mohamed Deylaff Owner oil depot, Mogadishu
n/a Prof Yahya H. Ibrahim Academic and Constitutional Advisor
61
Annexe 4 – Presentation for Feedback session
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
Annexe 5 - The consulting team
The ASI team comprises Juliana Stoyanova, Louise Cottar, Mohamed Ahmed Mohamud, Gareth O’Hagan, Elizabeth
Mungai and Anne-Claire Howard.
Juliana Stoyanova is the Team Leader and an expert in public sector reform and extractives governance, with a
successful track record of change programs in post-conflict environments
Louise Cottar is a political economy expert with 20 years of work experience in the Horn of Africa region, excellent
understanding of the dynamics of the political economy of Somalia.
Anne-Claire Howard is an Extractive industries senior professional with over 10 years’ experience in upstream oil, gas &
mining essentially on the African continent.
Mohamed Ahmed is a skilled geologist with experience and understanding of the Somali extractive industries sector.
Gareth O’Hagan leads Adam Smith International’s Extractive Industries Governance Service and has extensive experience
advising public sector organisations in developing and improving sustainable minerals sector governance.
Elizabeth Mungai is a Project Manager at the ASI Africa office in Nairobi and has several years’ public sector consulting
experience in trade, private sector development and public sector reform.
Annexe 6 - Adam Smith International’s Extractive Industries Governance Service
Adam Smith International is a professional services business that delivers real impact, value and lasting change through
projects supporting economic growth and government reform internationally.
Over more than 20 years, Adam Smith International has implemented some of the most complex solutions in many of
the world’s most challenging environments. We apply professional standards, technical know-how and cultural sensitivity
to every context. We’re proven to bring the best minds together and are known for turning policies into action. This
requires the highest quality people on every project. People empowered to overcome challenges with a ‘can do’ attitude
tempered with insight and pragmatism. Each team member is carefully selected, based not just on their technical ability,
but on their proven experience. It is this combination that ensures we deliver real societal impact and measurable
results beyond those anticipated.
Through our Extractive Industries Governance practice, Adam Smith International is a leading global adviser to
Governments seeking to improve governance of the oil, gas and mining sectors, and also helps clients leverage
investments in these sectors for broader economic and social development. We are accredited as an official validator of
the Extractive Industries Transparency Initiative (EITI), reflecting our strong commitment to good governance and
transparent natural resource management. Our expertise in the extractive industries includes:
» Political economy and economic assessments;
» Business linkages and economic development;
» Sector strategy and policy; » Legal and regulatory assessments and reform;
» Taxation and the fiscal regime for mining;
» EITI implementation and validation;
» Institutional reform and development; and
» Artisanal mining and rural livelihoods.
Contact [email protected] for further information.
