Somalia can overcome legacy of poverty through petroleum development

Engineers and visitors explore an exploratory well near Dharoor town, 350 km (217 miles) from the port of Bosasso on the Gulf of Aden in Puntland January 17, 2012. REUTERS/Abdiqani Hassan
Engineers and visitors explore an exploratory well near Dharoor town, 350 km (217 miles) from the port of Bosasso on the Gulf of Aden in Puntland January 17, 2012. Canadian oil and gas exploration company Africa Oil Corp. began drilling an exploratory well in Somalia's semi-autonomous Puntland region on Tuesday, the first to be sunk in the country since civil war erupted two decades ago. REUTERS/Abdiqani Hassan (PUNTLAND - Tags: ENERGY BUSINESS) - GM1E81I04KC01

By:The African report

Somalia has a tough legacy. Two decades of civil war and ongoing natural disasters, including droughts and flooding, have triggered the displacement of two million citizens. Almost 70% of Somali people live under the international poverty line of $1.90 a day.

The country depends heavily on international humanitarian aid and remittances from Somalis who work abroad. Agriculture, including livestock and crops, still accounts for more than 70% of the economy.

The Somali government’s priority is to reduce the poverty level and diversify the economy. Petroleum may play the key role in this transformation as it did half a century ago in other countries, such as Norway in Europe, Brunei in Asia, and the UAE. These countries previously relied on traditional industries, which also encompassed fishery. However, after having discovered oil, they now have some of the highest levels of income per head in the world.

Prior to 1991, international oil and gas majors had exploration agreements in Somalia, but they withdrew from the country because of the civil war.

In 2012, however, the federal government was restored, together with the federal member states, which led to the creation of all the necessary legal framework to re-attract foreign investors. One example is the landmark agreement to share any petroleum revenue between the central government and the regions. In 2019, Exxon and Shell made $1.7m in legacy payments for 1990-2008 owed under a previous concession agreement. This amount was the first distribution between the central government and the regions under the new Revenue Sharing Agreement.

In 2020, the government passed a petroleum law under which the Somali Petroleum Authority was established to regulate the industry and guide deals with international contractors. Consequently, the new licensing round for seven blocks has the potential to generate much greater revenue for Somalia and its regions. Geoseismic studies have shown that Somalia may have at least 30 billion barrels of oil and gas reserves, but this will take time to develop, as detailed exploration may take from three to five years, and only afterwards can production begin.

Nevertheless, the good news is that the exploration and production agreements are structured in such a way that they start to benefit Somalia even before the commercial discovery of petroleum is made. In advance of starting exploration, an international investor may pay a $1m signing bonus, as well as a separate bonus payment. There may also be also a royalty, licence fee and surface rent as well as other taxes to be paid along the way.

All these proceeds are shared between the central government and the regions in agreed proportions. Ultimately, once the international investor recoups their expenses, they start sharing the petroleum revenue under the Revenue Sharing Agreement with the people of Somalia.

Healthcare, water

Proceeds from petroleum can be invested into the building of infrastructure in Somalia; developing a viable water supply system and an improved healthcare service; as well as building schools to increase the level of literacy in the country. International petroleum investors will also be bound by their agreements to hire and train local personnel and use Somalia-made goods in procurement where possible. Somalia currently has to pay high prices for oil imports from the Middle East, but its own oil production will see reduced energy costs and make public transportation more affordable.

Hydrocarbon production can foster economic and social development in Somalia by providing access to affordable energy, opportunities for decent employment, business and skills development, increased fiscal revenues and improved infrastructure.

Even though developed countries have become more focused on renewable energy, East Africa (as a developing region) needs to pass the first stage of industrialisation. Petroleum can be a real game-changer for Somalia.

Industry analysts argue that some countries experience the phenomenon of the “oil curse” when petroleum revenues are poorly managed and abused by politicians, which curbs the development of other industries.

In contrast, through the Somali Petroleum Authority, Somalia has a well-designed system in place for overseeing the petroleum revenues and sharing them between federal, regional, and local populations to the benefit of all Somalis.

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