The Dangerous Smell Of Crude Oil That May Ignite A New Civil War In Somalia

Aug 2007

Part 2: The Dangerous Smell Of Crude Oil That May Ignite A New Civil War In Somalia

In part one I touched on some issues regarding background information about the current affairs of Somalia’s oil and related activities by the TFG president and his prime minister. I highlighted some of the serious implications associated with the actions of the major stakeholders. I also pointed out few recommendations, which I think are the most appropriate for the time being.

In part two, I will focus on the discrepancies and deceptions of the new draft oil law. I will point out many points, which aren’t mentioned clearly in the attached power point slides presented to the Somali delegation by Kuwait Energy and Medeco at the Malindi conference of June 2006 but not in the draft oil law. Exploration and production sharing agreements between some African countries and the multinational companies will be compared with the one proposed by Kuwait Energy and MedecoEnergi to Somalia.

In the power point presentation 11 principles, which are said to be the basis for the draft oil law are stated. But when you look closely at each slide it is clear that there is a big gap between the two documents. I am shedding light on the critical points that required the attention of the all Somalis whether they are in the Diaspora or in the country in order to try to stop the adoption of the new oil law. This oil law implicitly approves or builds foundation stones for the dangerous points mentioned in the slides as they will be issued as by laws by the ministry or the prime minister with the recommendations of the proposed Somali Petroleum Authority.

Slides 3 list the names of the Somali Petroleum Team and the foreign advisors of the TFG. The future chairman of proposed Somali Petroleum Authority and the suspected introducer of Kuwait Energy is number one in the list. Mr. Hussein Ali Ahmed is now the special advisor to the prime minister for oil and gas and interestingly lacks any past experience in the industry. Number two is Mr. Mohamud Olow Barrow who is the head of mission Somali embassy Jakarta. Mr. Barrow is a businessman turned diplomat, and together with the French chief political advisor of Mr. Gedi is believed to be the introducer of MedecoEnergi. The remaining 6 members of the Somali team are all closel associates of Mr. Gedi and their experience in the oil industry is no better than the other two. Technically even the legal counsel’s experience in oil and gas laws is in doubt as oil and gas law is a specialized subject.

Three of the foreign advisors are from Kuwait Energy and four are from MedecoEnergi, and the two lawyers hired for the drafting of the oil law by the above companies are from a Canadian firm. A valid question is; how can the same foreign people who drafted the oil law for their own benefit can be trusted on the Petroleum affairs of our country?

Slides 6 and 7 underline petroleum policy and petroleum law. Two fundamental questions that the parliamentarians might ask when the petroleum law is presented to them are elaborated – see slide 6- but none of the principles and policies are included in the draft oil law in order to make things clear for the parliamentarians.

Slides 9 and 10 talk about the Transitional Federal Charter and Article 67 states ‘The natural resources of the country such as the minerals, water, flora and fauna shall be public property and a law shall be enacted which defines the manner of exploitation for the common good’. This contradicts with the allocation of 49% share of the proposed Somali Petroleum Corporation for Kuwait Energy and MedecoEnergi. These companies are not investing a single penny in the exploration and production of oil in Somalia. They are just brokers who claim that they have expertise which is vital for the petroleum industry of Somalia, a claim dismissed by many Somali experts. To own such a share a company should have the technology and invest in the project as Conoco, Chevron and others did in Somalia. As brokers Kuwait Energy and MedecoEnergi shouldn’t own any shares in SPC and if they offer services to the TFG they should be entitled to a one off payment or commission.

Articles 71 section 2 states; ‘The 1960 Somalia Constitution and other national laws shall apply in respect of all matters not covered and not inconsistent with this Charter.’ The 1960 constitution or the laws laid down by the Somali Democratic Republic for the country’s natural resources are not consulted in the preparation of the new draft oil law.

Slides 14 and 15, in one hand underestimate availability of petroleum in Somalia and on the other hand say that petroleum is a temporal product and urge the authorities to go ahead with the exploration and production of petroleum by referring to a quotation from Zaki Yamani. It says that the grandchildren of today’s Somalis will not

thank them for saving petroleum for future generations. These are contradicting statements and show a low level of sophistication from the foreign so called advisors, and lack of experience from the so called Somali Petroleum Team.

Slide 17 mentions that Somalia lacks the financial and technical resources to explore oil by itself but it also says ‘There are foreign enterprises that are qualified financially and technically to do so, and are prepared to take exploration risks involved.’ The interesting question is who are these foreign enterprises that are willing to explore oil in Somalia’s chaotic situation? I am sure that only corrupt and reckless virtual companies such as Kuwait Energy and MedecoEnergi are those intended by the slide.

Slide 20 says that Somalia’s financial, legal and regulatory regime for petroleum should make it attractive for enterprises to explore, develop and produce petroleum in Somalia, and provide investors with assurance of stability. The possibility of these requirements with the current situation of the country is below zero. Even the relatively calm regions of Puntland and Somaliland cannot give any sort of stability assurance.

Slides 21 and 22 are self contradictory as they implicitly urge Somalia to be patient to receive its share of the oil revenues, while again stressing that Somalia needs money now and should get in advance whatever it can at the beginning of the operations. See the slides

Slide 26 states that regional and local consultations are necessary for petroleum activities to happen in Somalia. As a matter of fact, Mr Gedi consulted neither the existing regional governments of Puntland and Somaliland nor his president and the council of ministers during the preparation of the draft oil law, which is on the desks of the members of the parliament in Baidoa at the moment.

Slides 28 and 29, call for the need of a transparent regime. However, the draft oil law is not formed in transparent circumstance and environment. Many points stated in this power point presentation are deliberately omitted from the draft oil law in order to get the approval of council of ministers and the parliament. The ministers already approved the draft oil law.

Slide 31 suggests the establishment of a state oil company controlled by the government. The same is suggested in the draft oil law. However can we call a state company an organization 49% of its shares is owned by Kuwait Energy and MedecoEnergi a Somali company?

Slide 42 and 43 present a schedule, which shows a road map covering all activities to be implemented from June 12 to September 15 of 2006 by the TFG. These slides also state that 49% of the proposed Somali Petroleum Corporation is to be owned by Kuwait Energy and MedecoEnergi. Minister of energy has to approve 3 directors from these companies by August 31 of 2006 out of seven directors the company will have. The contents of slide 43 are included in the draft oil as follows:

Section 9.3.4 of the draft oil law says the chairman, managing director and other directors should be Somali citizens. Contrastingly, section 9.3.5 says that the ministry shouldn’t apply section 9.3.4 if it is satisfied with a non-Somali owing to his/her experience in the oil industry.

In slide 46 a draft model of Product Sharing Agreement is mentioned and its contents are neither included in the draft oil law nor in the presentation. Its presentation is postponed until the draft oil law is approved by the parliament. This raises doubts and begs questions about the intentions of the prime minister and his collaborators.

In slide 49 the draft Production Sharing Agreement proposes different payments to the government by the foreign contractor, which includes an acreage based fee of $10/square KM during the exploration face and $100/square KM after the finding of crude oil. This figure is very low and freezes use of land for other purposes during the contract period especially at the exploration stage.

In slide 50 it is clearly mentioned that the percentages allocated for the Somali Petroleum Corporation and the regional contractor, which are 30% and 10% respectively. As mentioned above 49% of the SPC’s 30% will be owned by Kuwait Energy and MedecoEnergi. Neither the slide nor the oil law mentions who owns the remaining 60%. But if we assume that the foreign oil companies are taking this large percentage it contrasts the with 51% local 49% foreign based foreign investment laws adopted in many African states such as Nigeria, Angola and Sudan.

Angola owns 51% of all production sharing projects in the oil industry. Sudan has different deals with the different foreign contractors and according to an investigation conducted by BBC Channel4 revealed that Cliveden Sudan and the Sudanese government signed a deal, which gives 71% share to the government.

One third of Nigeria’s daily oil production is produced by a joint-venture between Royal Dutch/Shell, Nigerian National Petroleum Corporation (NNPC), Elf Petrol and AGIP. 30%, 55%, 10% and 5% respectively are the individual shares of the above partners. NNPC also owns 60% of the second largest operation, which it shares with EXXONMobil.

Slide 51 present a financial statement that contradicts with the contents of slide 50. The proposed price is $50 per barrel. If we look at the first scenario that is based on 50 million barrels production, the total revenues should be $2,500 million, but the figure shown in the financial statement is $2,234 million. Where is the missing $ 66 million and who is getting it?

5.1% of the revenue is allocated for Somali Petroleum Corporation or $113 million, 49% or $55.37 million of which is to be pocketed by Kuwait Energy and MedecoEnergi. The figures don’t much up because the 30% and 10% allocation mentioned in slide 50 are replaced by 5.1% and 3.3% in slide 51. It is implicitly mentioned in the financial statement that the international oil companies or foreign contractors are getting 44.8%, a figure that is mentioned explicitly neither in the draft oil law nor in the presentation slides.

Slide 52 is again contradicting with the figures in 51. This time percentages change again, and to inflate the earnings of the Somali government a big junk of $713 million is omitted from the budget. Now the percentages are 58.6% for the government, 6.3% for SPC, 4.1% for the regional contractor and 30.9% for the foreign contractor. So, how can someone reconcile between the figures in slide 51 and 52? And how can we trace the whereabouts of the nearly 28% of the total expected revenue from the first 50 million barrel? Isn’t a deliberate cover up from the so called advisors or lack of numeracy skills from the part the Somali Petroleum Team?

Figures in slide 53 are more confusing then the numbers in 51 and 52. Comparisons in the slide are based on a production rate of less than 25000 barrels per day, where as the previous estimates are based on 50 million barrels. It says that the net government share is 55% and again it concludes that the government share is 69%.

Slides 63 and 64 list many flaws in the agreement between Puntland and Consort Private Limited, and the associated implications. It seems to me that with all the discrepancies and flaws described above the difference between Kuwait Energy/MedecoEnergi and Consort Private Limited is zero. Both parties are trying their luck with ignorant and corrupt administrations. I hope that our people will wake up to confront the corrupt TFG and Puntland officials who betrayed their country and their people. Puntland’s agreement and the draft oil law can create more problems to Somalia than the benefits that few people are gaining from their executions.

Slide 67 contains strategies to be implemented with regard to western oil companies which had concessions before 1991. The implications of these recommendations were discussed in part one and I want to stress again that the TFG should consider renegotiation of these deals with professionalism and through care.