Annex 1: Background: The Oil and Gas Sector in Somalia

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1 S/AC.29/2015/SEMG/OC.31 1 Annex 1: Background: The Oil and Gas Sector in Somalia Oil and Gas as a Threat to Peace and Security The SEMG discussed the threat to peace and security posed by the extractives sector in Somalia in its report in 2013 (S/2013/413). The Group highlighted both the risks of corruption in the sector, and the shortcomings in transparency and capacity of Somalia s petroleum institutions: the Somalia Petroleum Corporation and Somali Petroleum Authority. It therefore recommended urgent international support to the Somali Government to strengthen capacity within the SPA and to create an independently managed cadastre of oil licences, which should be linked to a clear financial trail for any signature fees collected during any licensing and relicensing of oil acreage. The Monitoring Group s 2014 report (S/2014/726) described the lack of transparency and failure to obtain parliamentary approval prior to the awarding of the Soma contract. 79 In the context of both the Soma investigation and investigations into oil exploration and concessions elsewhere in Somalia, the SEMG specifically recommended that the Security Council consider deciding in a resolution to request a moratorium on all oil licensing until a legal understanding is reached between the regional and federal authorities in respect of ownership of natural resources in Somalia. In April 2014 Adam Smith International, an international consulting firm, produced a report titled Needs Assessment for the Extractives Industry in Somalia, commissioned by the UK Department for International Development. Though never published, the report offered similar recommendations: the establishment of an Extractives Technical Advisory Panel consisting of international and national experts, and the provision of long-term and significant technical support to Somali institutions engaged in the extractives sector. On Soma specifically, the report notes: We received unverified information that some pre-1991 license holders had offered to share geological data with FGS but withdrew these offers when the Soma Oil & Gas deal focusing on data acquisition was signed. Some have also offered capacity building support, which has not yet been taken on by FGS. 80 Under a chapter dedicated to transparency and accountability, the report continues: The SOA between the Federal Government of Somalia and UK Soma Oil & Gas awarded through direct negotiations has raised 2014.SOMALIA 79 See S/2014/726, annex Adam Smith International, Needs Assessment for the Development of Somalia's Extractive Industries, April

2 S/AC.29/2015/SEMG/OC.31 2 serious concerns amongst stakeholders, including the industry, about the Government s commitment to transparent and fair management of its extractives sector. The FGC Reviews of Public Sector Contracts and Concessions reached a similar conclusion: In countries with no previous petroleum discoveries, the approach taken to exploration is similar to what we now see in Somalia. Investors submit unsolicited applications to develop production blocks, leading to direct negotiations. These generally lack transparency and accountability, and will usually result in sub-optimal deals Given these considerations, and the risks to the country of allowing an expansion of ad hoc licensing, it would be prudent for the Federal Government to postpone direct negotiations on PSAs until a new legal and fiscal framework for the sector has been established. 81 Internal Regulation The Somalia Petroleum Authority (SPA) was legally established by the 2008 Petroleum Law (Article 19) to serve as the competent regulatory authority to regulate Petroleum Operations replacing the function of the then-ministry of National Resources internal Petroleum Regulatory Affairs Department. The SPA was to be given the power to grant certain contractual concessions to oil and gas firms, including Reconnaissance Authorisations, PSAs, and Surface Access Authorisations. It was also mandated to investigate individuals who contravened the Law, and entities contravening Authorisation conditions, independently of the Ministry. The Petroleum Law directed the Somali government to create the SPA once it was satisfied that the quantity of Petroleum Operations in Somalia [were] sufficient to justify the costs of establishing [it]. Despite significant interest from numerous oil and gas companies including both oil majors still holding rights to pre-somali civil war force majeure blocks, and smaller exploration companies 82 the FGS has yet to establish the SPA. As a result, the Ministry of National Resources granted Soma both the SOA and Reconnaissance Authorisation, as well as conducted negotiations on PSAs. Its successor as of January 2014, the Ministry of Petroleum and Mineral Resources, has negotiated subsequent arrangements. Even in the absence of the SPA, the 2008 Petroleum Law requires the FGS under Article 44 to make regular publication of all material Petroleum-related payments by Authorised Persons to the Government and all material revenues received by the Government from SOMALIA 81 FGC Reviews of Public Sector Contracts and Concessions, 8 January International oil and gas companies with which the FGS has conducted recent negotiations include: Allied Petroleum (SO) Corp., Amsas, BGP Inc., Kilimanjaro Capital, Milio International, Mubadala Petroleum, New Age Limited, Royal Dutch Shell plc, Schlumberger Limited, Spectrum Geo Ltd., and Total S.A.

3 S/AC.29/2015/SEMG/OC.31 3 Authorised persons to a wide audience in a publicly accessible, comprehensive and comprehensible manner. 83 To date, the details of payments made by Soma to the FGS have not been made public. SOMALIA 83 The same article requires that [a]ll material payments and revenues are to [be] reconciled by a credible, independent administrator appointed by the Government, applying international auditing standards.

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