Surrounded by success stories of hydrocarbon finds in neighboring countries, the Somalia area finds itself trapped by political instability and security issues that have left investors at a standstill.

Anglo-Turkish Genel Energy—no stranger to risky operations considering its presence in Kurdistan, Iraq—took a chance in the semi-autonomous region of Somaliland, considered to be among the last frontier regions in East Africa. Less than two years ago Genel was awarded exploration licenses for two onshore blocks and later acquired interest in three additional blocks. Hopes were to successfully tap targeted resources of more than 1,000 MMbbl in blocks SL-10B and SL-13 and another 1,000 MMbbl in its Odewayne Block assets.

The company reported that gravity and aeromagnetic were acquired and interpreted over its 40,000 sq km (15,444 sq miles), but seismic operations stopped in September 2013 and haven’t resumed since then due to a deteriorating security environment. Disputes and clan loyalties already have fractured the country, creating two regions: Puntland and Somaliland. But on top of other challenges, such as famine and infrastructure issues, the Somalia region has endured waves of violence, most notably involving al-Shabaab, a Somalia-based organization believed to be responsible for numerous deadly attacks.

“We are happy with the assets that we have,” Andrew Benbow, a spokesman for Genel Energy, told E&P. “We believe that Somaliland has very significant potential. The geology is analogous to that in Yemen, which is a prolific oil province, and the petroleum system has been proven through numerous oil seeps. These are potentially billion-barrel prospects, although we do not give specific guidance.”

Estimates show Somalia could hold up to about 110 Bbbl of oil reserves in addition to possibly large gas fields offshore, according to a report released this month by The Heritage Institute for Policy Studies, a Somali independent think-tank.

Contract concerns

The potential for discoveries has not only attracted Genel, but others including DNO International and Ophir Energy (Somaliland) as well as Africa Oil Co., Horn Petroleum and Range Resources (Puntland) to the area.

Horn Petroleum has 60% working interests in the Dharoor and Nuggal blocks in Puntland. In first-quarter 2014, the company reported that it plans to drill one exploration well in each block after receiving encouraging results from two wells drill in 2012 on the Dharoor Block.

“Efforts are now focused on making preparations for a seismic acquisition campaign in the Dharoor Valley area, which will include a regional seismic reconnaissance grid in the previously unexplored eastern portion of the basin as well as prospect specific seismic to delineate a drilling candidate in the western portion of the basin where an active petroleum system was confirmed by the most recent drilling at the Shabeel-1 and Shabeel North-1 locations,” Horn said on its website. “The company has identified a suitable location to drill an exploration well in the Nugaal Valley block. However, given certain operational and political issues, a decision to move ahead on this will not be taken until adequate resolution is achieved.”

Among the key issues are “the legitimacy of oil concession contracts issued by former and present central Somali governments and the regional states (Puntland and Somaliland), many of which cover overlapping territory; and the border dispute between Somalia (including Puntland) and Somaliland (which overlaps a proportion of our Nugaal block),” Horn said.

After emerging from civil war and creating a central government, one of the first steps taken by the federal government of Somalia (FGS) was to declare illegal oil and gas contracts signed by regional governments, GlobalData upstream analyst John Sisa said.

“A degree of contract sanctity will be viewed positively by the industry with respect to active contract holders, but a working relationship between the federal and regional governments is crucial for this,” Sisa said. “Recently, the Somaliland government granted consent to Sterling Energy to acquire a 40% interest in the production-sharing agreement [PSA] covering Block SL6 and part of Blocks SL7 and SL10 from Petrosoma and Jacka Resources. This transaction’s approval will be a test of the sovereignty of the FGS’s new federal constitution, since the FGS was not consulted over this.”

Sisa said the Somalia central government plans to sign at least 30 production-sharing contracts by year-end 2014, which will replace existing contracts. “Based on the Somali draft PSA, the central government will collect a share of revenues between 55% and 60%, if at least 50 million barrels of crude oil recoverable reserves are discovered. This will equate to a substantial return for the government.”

How the situation plays out remains to be seen as regional conflict remains.

Security concerns

Genel suspended its operations in Somaliland in September 2013 due to “a deteriorating security environment,” Benbow said. He could not put a timeframe on the resumption of the company’s activities, but welcomes efforts by the Somaliland government to form an oilfield protection unit.

Bloomberg recently reported that Puntland and Somaliland have largely avoided the violence suffered by other parts of Somalia. However, territorial disputes and the pursuit of oil, including discrepancies in licensing regulations across the country, are adding to tensions. Citing a May 28 memorandum by the UN Monitoring Group on Somalia and Eritrea, the report said the planned deployment of the oil-protection unit could “deepen the strains.”

“Urgent attention must be given to this issue to avoid commercial activity triggering conflict further down the road,” Jarat Chopra, the coordinator of the monitoring group, said in the report. He later cited recent clashes and deployment of forces by both Somaliland and Puntland as signs. “While there has not been major conflict to report, political and military tensions have nonetheless escalated in recent weeks.”

The Heritage Institute study, written by Dominik Balthasar, pointed out that security agencies have been developed in Puntland in the past to protect oil and gas operations. It listed as example Africa Oil’s operations being protected by two security firms, whose operations resulted in the formation of an Exploration Security Unit—a special branch of the Puntland Security Forces—in 2011.

However, “such changes not only further fragment Somalia’s security architecture, but render it increasingly difficult for the federal government to establish a monopoly over the means of large-scale violence and enforce particular policies,” Balthasar said in the report. “Consequently, the UN Monitoring Group recommended in a letter dated July 12, 2013, that ‘oil companies should cease and desist negotiations with Somali authorities or risk fueling nontransparent practices and political disagreements that could exacerbate clan conflict and constitute threats to peace and security.”

Possible solutions

While developing hydrocarbon resources could ease some of the region’s problems, all involved should proceed with caution, Balthasar said in the report.

“Just as “oil has fueled the struggle for power and rent, and delayed, if not derailed the state building process [in Iraq]”, Somalia could be met by a similar fate, according to the report. “This risk not only flows from the country’s significant vulnerability to suffer from the effects of the resource curse, but is also related to the nascent stage of Somalia’s state-making project.”

Balthasar offered some recommendations:

  • Somali legislators should work together with regional elected representatives to revise oil and gas E&P legislation to close any loopholes and ambiguities, which he admitted would be “a hard nut to crack;”
  • Acquire the expertise needed to effectively negotiate and mange agreements with oil companies;
  • Create a sovereign wealth fund to receive revenues from hydrocarbon production until legislation is established to allocate how the funds will be divided; and
  • Devise a public relations strategy concerning hydrocarbon E&P.

He urged oil companies “to take great caution not to upset the little progress toward state-making that Somalia has achieved throughout the recent past,” abide by national laws, promote social responsibility initiatives, and help Somali authorities “manage popular expectations and set up relevant institutions as well as technical and managerial capacity.”

Balthasar added, “It would also entail that international firms await the conclusion of political and legislative proceedings at the part of Somali authorities, before moving exploration and exploitation initiatives forward.” Time will only tell how long that will take.

In the meantime, for Genel, “discussions continue with the government in order to facilitate a resumption of activity,” Benbow said.

The U.S. government is also stepping up its efforts to address concerns in Somalia, with plans to appoint an ambassador for the country. U.S. Under Secretary for Political Affairs Wendy Sherman spoke this month about foreign policy in Somalia. While her speech was not focused on energy, she listed the industry as one of the key industries being targeted for improvement.

Contact the author, Velda Addison, at vaddison@hartenergy.com.