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SOMALIA: This New Frontier Isn’t Ready for Oil

Bottom Line: Somalia plans to sign 30 PSCs this year with foreign oil companies and auction off over 300 new oil blocks, but oil rights here are not solidified and this will be another bloody mess.

Analysis: Late last year, Somalia announced it would auction off 308 oil blocks, newly delineated. This has caused a bit of rush on Somalia, from the juniors to the supermajors, like Royal Dutch Shell and ConocoPhillips.

This pending rush on Somalia is premature. The country’s new government is transitional and dysfunctional at best, and by no means does it control the country—the militant al-Shabaab has been weakened, but certainly not driven out and still controls some key areas. Somalia’s coast is also a major piracy venue. It will be impossible to determine the power brokers here to land contracts, especially for the juniors. A multitude of influential tribes and militias are trying to gain control over oil prospects and dealing with the new government is only a small part of the equation. The power brokers are shifting and the dynamism is impossible to keep up with. It is difficult for a government to delineate new oil blocks on territory it does not fully control. The arrival of foreign oil companies will speed up territorial conflict over oil.

Somalia Regions of Control

Somalia’s premature oil ambitions will also see it butt heads with Kenya over disputed offshore blocks. Kenya has the upper hand here, and it’s already licensed blocks in this disputed territory. Kenya has played an instrumental role in fighting back against al-Shabaab in Somalia, and is currently guarding Somalia’s strategic Port of Kismayo. So we have to watch Kenya’s every move in the Somalia oil game. Kenyans should be considered among the key power brokers here.

No oil deals have yet been signed, because no one’s sure with whom they should sign them: the government or local authorities. The government is concerned that foreign oil companies will grow impatient and start signing deals with local authorities who claim rights over the oil. This is a legal quagmire that will take some time to sort out—and the sorting out is likely to be bloody. There are also supermajors who have blocks licensed out in 1991 and are waiting to restart operations. Among them are BP, Chevron, Conoco, Eni and Shell, and most of them want their property back, but from whom? Still, the government insists it will sign 30 PSCs this year, starting with those who had acreage in 1991.

The man in charge, on paper, is Abdirizak Omar Mohamed, head of the Natural Resources Ministry, who recently returned to Somalia from Canada, where had worked for 3 decades as a civil servant.

Recommendations: We do not recommend this as a viable venue at this time, especially for the juniors who have neither the capital nor the capability to do the necessary due diligence and networking to secure a contract and maintain its security. It’s best to wait and see how the supermajors influence this scene for better or worse and to see how the dust settles.

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