Somalia: Political disputes force companies to withdraw from Puntland

04 Aug 2015

Somalia: Political disputes force companies to wit...
The withdrawal in late June of Africa Oil and Range Resources from the semi-autonomous region of Puntland highlights the challenging political environment facing investors in Somalia’s oil and gas sector. The companies’ departure will be seen as a success for the federal government, which is engaged in a long-running dispute with regional authorities over the right to award oil licenses. The withdrawal is unlikely, however, to bring any further clarity to the licensing process, raising the prospect of further disputes and contract alteration in the medium term. 
Africa Oil cited disagreements between federal and regional authorities over the right to award oil licenses as the reason for its departure from Puntland. Through its subsidiary Horn Petroleum, Africa Energy signed a production sharing agreement with the Puntland government in 2007 for the Nugaal and Dharoor blocks and was later joined by partners Range Resources and Red Emperor Resources. However, the company’s right to the concessions has been constantly contested by the federal government, which claims that only it has the authority to award licenses in Somalia. The companies’ withdrawal means there are now no oil companies still operating in Puntland.
The uncertainty surrounding the legitimacy of the Puntland concessions stems from a long-running dispute between the federal and regional authorities over the award of oil licenses. Under the Somali constitution, natural resources may only be allocated in negotiation with the relevant regional authorities, a point that Puntland and other regions have used to assert their sovereignty over the licensing process. Mogadishu, however, reverts to the 2008 Petroleum Bill, which states oil licensing is a federal matter, though the bill itself has yet to be passed by parliament.
These discrepancies have meant Africa Energy’s operations in Puntland had always been considered high-risk, but debate over the legitimacy of its operation had intensified over the past 18 months. Although the company drilled two dry wells in 2012, it subsequently suspended operations while it sought clarification from federal authorities over the licensing dispute. However, in the following years there has been little sign of a resolution to the dispute, as regional authorities have continued to challenge Mogadishu’s authority and Somalia’s fractious parliament has been unable to agree on the Petroleum Bill. Concerns around the legitimacy of the concessions prompted Red Emperor to withdraw from the region just two weeks after the new government was appointed, and once Africa Energy announced it would also exit Puntland in June, Range Resources had little choice but to follow suit. Puntland was a non-core asset for Range, which had no value attributed to it on its balance sheet.
It is likely that the complex local conditions associated with operations along the Somaliland-Puntland border also contributed to the companies’ withdrawal. Since 2012, the joint venture partners had been unable to access the Nugaal block due to opposition from clans in neighbouring Somaliland. Similar considerations have previously delayed other upstream activities in the region. In September 2013, Anglo-Turkish company Genel suspended operations in the breakaway region of Somaliland in blocks adjacent to Nugaal citing unspecified “security” reasons. The region is far from al-Shabaab’s area of operations, prompting some Somali media sites to speculate the reason may have related to opposition from clans in the region, specifically those calling for a new state of Khatumo in Sool, Sanaag and Cayn (SSC) provinces. Khatumo clans have carried out a series of attacks in the SSC region since 2012, while both Puntland and Somaliland have increased their forces along the contested border to assert their sovereignty. On 27 July 2015, Genel announced it planned to return to Somaliland to continue its 2D seismic survey with assurances from the breakaway government in Hargeisa that it would provide adequate security. The ability of the company to complete the project within the two-year extension granted to it in May 2014 will be a key test for the prospect of operations in the region.
Although the news of Africa Oil’s departure from Puntland has likely been welcomed in Mogadishu, the federal government’s legal position remains in question. The fractious nature of the Somali parliament, which has seen the collapse of three governments over the past 12 months, means the petroleum bill is unlikely to be passed before the 2016 election at the very earliest. Doubts over the viability of the elections due to logistical and security constraints mean the vote itself could be delayed, further prolonging the current ambiguity.
Mogadishu’s position has been further undermined by the fact that the one agreement it had entered into, with Soma Oil and Gas in 2013, came under a corruption investigation on 1 August by the UK’s Serious Fraud Office. Little is known of what the SFO investigation relates to, but it has since been revealed that the United Nations Monitoring Group for Somalia and Eritrea was investigating payments made by Soma to the Somali government as part of a “capacity building programme”. The allegations of corruption could now delay the government’s plans to award production sharing agreements following the seismic survey carried out by Soma, as it comes under pressure to review licensing arrangements and introduce transparency reforms to existing legislation.
Even if the petroleum bill is finally ratified, this is unlikely to end the long-running disputes between federal and regional authorities. The emergence of new statelets in Jubaland, South-West State and Galmadug, alongside attempts to create new regional entities in Middle Shabelle and Hiran and Khatumo, will continue to undermine the authority of the federal administration and delay any legislation that would expand it powers. Somaliland is by far the most independent region and is unlikely to yield to any laws passed in Mogadishu in the foreseeable future. The promise of lucrative oil concessions in some of these regions is likely to intensify competition over sovereignty, further fragmenting Somalia’s federal system. Future concessions awarded by regional authorities will continue to face similar legal challenges linked to ownership disputes, threatening operators with the risk of suspension and delay to their business ventures.
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