Somalia lacks legal framework and capacity to license oil drilling-Petroleum PS

By T. Roble

Somalia does not have the capacity and requisite legal framework to engage international oil companies to start oil drilling, a senior government official has said warning the anticipated bid rounds slated for February could compromise the country’s interests and drive away potential investors.

In a letter addressed to the Minister of Petroleum seen by Goobjoog News, Jamal Mursal, the Permanent Secretary in the same ministry says the announcement of the bid rounds fails to take into consideration the prevailing legal and capacity limitations in the country.

“This announcement comes in a time when Somalia is not technically ready nor transparent enough to move in a predictable direction under an accountable leadership,” says Mursal.

Mursal adds that the Ministry staff is inadequate to undertake any contract negotiations. “Up to the present, there is no qualified and trained Negotiation Team/Committee that can handle negotiations and protect the interest of Somalia in producing a fair deal/contract with the International Oil Companies.”

“The fiscal terms in the Petroleum Bill are not based on an existing law.

Ministry of Petroleum director general Engineer Karar Doomey said last week while attending the Africa Oil Week that Somalia will be launching bid rounds for oil companies in February.

“On the 7th of February in London, Somalia is going to be holding the first licensing rounds of multiple acreages,” said Doomey. He added the country has at its disposal 206 oil blocks and will be auctioning blocks in southern Somalia. Doomey added all the legal frameworks will be ready by February.

According to Spectrum Geo which completed its acquisition of 2D seismic data offshore in Somalia in May 2016, the Ministry of Petroleum will unveil the final block delineation, expected to consist of up to 50 blocks covering a total area of over 173,000 km2.

But in his letter dated November 18, Mursal warns Somalia could be walking into a deal with little understanding of what it entails. According to Mursal, agreements between the federal government and the federal member states must first be anchored in law noting the Baidoa pact in June between the two levels of government must be reflected in the Federal Constitution and incorporated in the Petroleum Bill.

Even with the passage of the current Petroleum Amendment Bill, Mursal notes, Somalia would still be in for a raw deal. “The fiscal terms in the Petroleum Bill are not based on an existing law. The royalty, Corporate Income Tax, Profit-based Special Tax and other taxes (if existing) were designed a long time ago and applied to this modern day where the market environment is very competitive and where the petroleum industry is changing by the day.”

According to Mursal, the Ministry of Finance and the International Monetary Fund (IMF) is currently developing tax codes which must be incorporated into the Petroleum Bill but that will be feasible as from mid-2019 when the Tax Bill will be tabled in Parliament.

“Without a proper Tax Code in place, IOCs (International Oil Companies) will not trust to enter into a long-term agreement with Somalia and announcing a bid round is obviously a premature thing to do,” says Mursal.

Mursal also questions the tax exemptions in the current Petroleum Bill and the Production Sharing Agreement as incentives for investment noting Somalia cannot afford to grant such exemptions

“Prior to anything, the legal regime of Somalia and its instrument should be in harmony with each other. Starting from the Constitution, the Petroleum bill, Legislations on the environment and the Somali Petroleum Authority and the Model Production Sharing Agreement and any new Tax Code – all should complement each other and should not contradict.”