Somalia’s Black Gold Rush

[dropcap]Oil continues to be a promising source of revenue for war-ravaged Somalia, where interest in black gold has picked up in recent years. The stable, semi-autonomous region of Puntland recently announced that it will conduct a survey to search for oil, with licensing expected to come soon. Although oil has yet to flow, multiple companies have started exploring the region and signed contracts with the Somali government to tap into the country’s oil wealth.

The flurry of recent activity follows a general trend in oil exploration in East Africa. The growth in oil production will no doubt transform these countries, but Somalia stands out, given its historical instability and fragile peacemaking process. Reports have warned that oil production could lead to border disputes over control of this precious resource. Although oil could support much-needed economic growth, the threat of destabilization and further corruption in an already fragmented country makes exploitation a risky venture.

As Somalia’s central government made progress against the militant group al-Shabab in recent years, it has invited international oil companies to explore for oil reserves. The London-based firm Soma Oil and Gas has already completed seismic surveys earlier this year; the government has also encouraged Royal Dutch Shell and ExxonMobil to reactivate contracts that they had suspended when the state collapsed in 1991.

The economic potential of oil production in Somalia is huge - estimates put the country’s total oil reserves at 110 billion barrels, making the country’s deposits the sixth largest in the world. However, production may only begin six years from now, and Somalia’s political and economic future is far from certain.

Puntland’s recent ventures have sparked tension with neighboring Somaliland, which has claimed independence from the rest of Somalia since 1991. Because Somaliland disputes its official borders, it has quarrelled with Puntland over their boundaries due to the implications over oil ownership.

Puntland also faces threats from the current government in Mogadishu. Under Somalia’s decentralized constitution, individual territories have the right to directly negotiate contracts with oil companies. Consequently, the central government is concerned that it may not reap the benefits of production. Over the summer, Puntland officials strongly criticized the federal government’s move to introduce a law that would give it more control over oil and gas contract negotiations. The bickering has had direct effects on business--in June, Canada-based Africa Energy dropped its exploration acreage in Puntland, citing political uncertainties.

As seen elsewhere in Africa, the presence of multinational corporations in the commodities sector raises concerns of corruption. Soma Oil has already been probed by the U.K.’s Serious Fraud Office over allegations of “systematic payoffs” to Somali officials. A confidential U.N. report claims that half a million dollars were improperly disbursed to Somali officials as part of a capacity-building program. The company has denied any wrongdoing, claiming that its dealings with the Somali government have been “fair and balanced.”

The U.N. is currently pushing to introduce a moratorium that would ban oil deals in the country, arguing that the Somali state lacks the sufficient legal institutions to prevent exploitation of its resources. Both Soma Oil and the Somali government have opposed this measure, arguing that such an act would violate Somalia’s sovereignty.

The potential for oil in Somalia remains a precarious situation. On one hand, it provides much-needed money to redevelop a Somali state that has suffered from years of war and underinvestment; on the other, it may further splinter Somalia’s already-loose federation and induce greater corruption. With firms eager to explore the country’s reserves despite low oil prices, the launch of Somalia’s oil industry seems inevitable. The question is how this process will fit into the state’s current reconstruction plan, and what measures the international community will take to mediate tensions.