SOMALIA AND THE OWNERSHIP OF ITS OIL AND GAS

Authors: Rebecca Major, Jeremy Griffin and Mika Morissette

Since the collapse of Somalia's central state in 1991 and the ensuing decades of civil war, the central government's ownership rights over Somalia's oil and gas have been called into question, particularly in Somalia's semi-autonomous regions.

As set out below, the central government (the Federal Government of Somalia or "FGS") and the governments of the semi-autonomous regions (conveniently located in some of Somalia's most oil rich areas) have both claimed ownership. For international oil and gas companies ("IOCs") seeking to do business in Somalia, this raises a key question – who should they contract with?

With the country slowly moving towards greater stability, it is clear that both the FGS and the government of the semi-autonomous regions, now classified as part of the Federal Member States ("FMS") (relevantly, Puntland and Somaliland are considered herein) are seeking to increase foreign investment and interest in Somalia's oil and gas sector. In February, Somalia invited bids for 15 offshore blocks. Applications to qualify to bid must be received by 11 July 2019, the Ministry is set to qualify potential operators and non-operators by 29 August 2019 and bids must be received by 7 November 2019. Operators must demonstrate drilling experience beyond 500m water depth. Further information, including a model offshore production sharing agreement, can be found on the designated website: somalialicensinground.com.

To this end of increasing investment, it appears that there has been a cooperative shift in relations between FGS and FMS and that consequential change to the legal framework is on the horizon with a new bill for the amendment of existing petroleum laws (the Petroleum Act Amendment Bill 2019) debated in Parliament on 8 May 2019.

Below we have attempted to summarise the issues relating to state ownership of oil and gas in Somalia, the recent shift in cooperation and the opportunities this may bring for IOCs and other investors interested in doing business in Somalia's oil and gas sector.

Oil and gas opportunities in Somalia

Geologically similar to oil-rich Gulf countries, the Horn of Africa is known to contain untapped oil reserves. The bulk of these reserves are estimated to be located in the north of the country (the tip of the Horn), in or in offshore blocks bordering the two semi-autonomous regions of Puntland and Somaliland. From an offtake perspective, Somalia is well placed given it sits on the edge of major shipping routes, in particular the Gulf of Aidan though which roughly 11% of the world's seaborne oil transits to and from the Suez Canal.

Decades of civil unrest have meant that these reserves remain untapped. This has created opportunities for IOCs as the country moves towards greater stability. Both the FGS and FMS have been keen to promote this and attract international investment. Up until recently, however, investors have often found themselves embroiled in disputes between the FGS and the FMS over who has authority to grant exploration rights.

It is not hard to find past examples of oil companies being disrupted regardless of the side they chose. In Puntland for example, Range Resources, which chose to contract with the Puntland government, saw fierce opposition to its seismic activities by the central government and ultimately withdrew from Somalia in 2013. On the other hand, also in Puntland, Spectrum and BGP Inc., which, in 2016, had planned to conduct seismic activities offshore Puntland, saw the Puntland Petroleum Minerals Agency threaten to seize vessels found offshore for lack of a valid permit.

Who owns oil rights in Somalia

The root of the uncertainty in relation to state ownership of oil rights in Somalia comes from Somalia's recent evolution into a federal system. During the decades of civil war, the FMS emerged as semi-autonomous governments stepping in to fill the role of the destabilised central state. During this political instability, many IOCs contracted with the semi-autonomous regions as these were understood to, at the time, have more control and authority on the ground.

To date, Somalia's legislation provides no clear guidance. The Petroleum Law 2008 (a federal law which purports to apply across Somalia, including the semi-autonomous regions) suggests that FGS is the appropriate authority to contract with in respect of oil and gas exploration and exploitation. The Petroleum Law 2008 states that:

all agreements pertaining to petroleum which were signed after 1991 with entities purporting to be governments of all or part of Somalia are considered non valid.

These waters were muddied, however, when a new transitional Somali constitution entered into force in 2012 following the establishment of a democratically elected central government in 2009.

The transitional constitution:

• does not expressly grant the FGS sole authority over oil and gas concessions (it grants FGS sole authority over foreign affairs, national defence, citizenship and monetary policy). Other than in these areas, the transitional constitution specifies that the division of power shall be 'negotiated' between the FGS and FMS;
• provides that the FMS can continue to exercise any powers conferred in their state-level constitutions until these are harmonised with the federal constitution; and
• gives the FMS authority to negotiate concessions alongside the FGS.

The Puntland constitution is silent on the ownership of natural resources; however, through actions such as threatening to seize vessels conducting "unauthorised" seismic activity, the government of Puntland has shown that it considers itself to own authority over resources in its territory.

On the other hand, the constitution of Somaliland (which, unlike federalist Puntland and despite being considered an FMS by the FGS, defines itself as an independent nation) expressly claims that natural resources belong to the "nation" of Somaliland.

From the legal framework described above, there is no clear answer to the question of whether an IOC should contract with an FMS or the FGS in respect of oil and gas concessions in an FMS.

In essence, the legal framework provides that agreement needs to first be reached between the FMS and the FGS on the answer to this question. A core part to any such agreement would be the details of a revenue sharing mechanism which would specify revenue sharing between the FGS and the FMS (and the IOCs).

Notably, in 2016 a revised Petroleum Bill was put before the Federal Parliament in an attempt to clarify the rules around petroleum revenue sharing. This Bill recognised that "petroleum belongs to the Federal Republic of Somalia and the Regional Member States" while at the same time created firmer guidelines for permit and licence granting (to be done by the FGS). This bill was never passed but in May 2019 it was dusted off and put before parliament in the form of the Petroleum Act Amendment Bill 2019 ("Amendment Bill"). Talks are reportedly being held on the Amendment Bill between the President of the FGS and the heads of the FMSs.

The Amendment Bill, however, is not without controversy with criticisms focusing on the lack of consultation and that the tax and royalty provisions do not align with the current state of tax law in Somalia (which is currently under review with assistance from the IMF).

While the legal framework may not have changed yet, there are signs that the political framework in Somalia is shifting towards better cooperation. UN sources report that in June 2018, the World Bank facilitated a meeting between the FGS and the FMS where it was reported that an agreement was reached on the sharing of resources. This builds on attempts to work out a better revenue sharing system in the Amendment Bill and the ongoing discussions with the FMS.

We should also not forget that, in addition to internal issues, there is also a long term maritime border dispute between Kenya and Somalia before the International Court of Justice. Kenya claims some of the areas offered by Somalia in the February 2019 auctions.

Conclusion

There is no clear answer to the question of whether an IOC should contract with an FMS or the FGS in respect of oil and gas in an FMS. Bidders interested in engaging in the current round of submissions due in July 2019 should bear in mind the overarching context in Somalia. As set out above, historically, there have been disputes and tensions where an IOC has sought to contract with either the FMS or the FGS and not involved the other. Therefore, it appears that the prudent approach currently would be to contract with the relevant FMS with the prior approval from the FGS (or vice versa).

However, there has been a cooperative shift in relations between FGS and FMS and a reported agreement on resources sharing. Following this shift, clarification of the legal framework in respect of oil and gas ownership, and on other key points such as revenue sharing and the role of regulatory bodies, appears to be on the horizon.

Following the improvement of the legal framework and given Somalia's return to stability, Somalia is well positioned to be a country of broad opportunity for IOCs and other investors in the oil and gas sector.

Depending on the area in question, IOCs should also be aware of the maritime dispute between Somalia and Kenya which is currently being resolved before the International Court of Justice.

For further information please contact Rebecca Major, Partner, Jeremy Griffin, Associate, Mika Morissette, Associate, or your usual Herbert Smith Freehills contact.