Villa Somalia approves previously nullified deal with a US Oil Company

21.10.2022: Mogadishu, Somalia

President Hassan Sheikh Mohamud has given a green light for an American upstream oil and gas exploration and production company known as Coastline Exploration Ltd to move ahead with its plans in Somalia following nullification by the previous administration.

The President approved a seven production-sharing agreements (PSAs) in exchange for an initial $7M signature bonus payment to Somalia, with Coastline Exploration Ltd beginning the exploration process immediately.

“I would like to thank Coastline for its commitment to Somalia, as it has fulfilled its promise of investing here, unlike so many other companies. Coastline clearly sees significant opportunity in Somalia and we share its vision”

President Hassan Sheikh Mohamud, Federal Republic of Somalia

The Federal Government has said that it carried out an in-depth review of the award process and made adjustments to five articles within the agreement. However, some have questioned who this negotiation team was, what the negotiation framework was and what were the benchmarks. The Federal government remained very secretive regarding negotiations up until this point.

Nevertheless, following the agreement Coastline said that it would shoot 2D seismic data and drill an exploration well.

During the meeting between Heads of the Federal Government and Coastline Exploration Ltd in Mogadishu, CEO William Anderson welcomed the approval and expressed optimism.

“Revenues from the discovery of commercial quantities of oil will be transformative for Somalia.”

William Anderson, Coastline Exploration Ltd CEO

The non-executive chairman Jacob Ulrich said Coastline was confident that it would discover “major energy reserves” in the East African country.

A Previously Nullified Deal

Back in April, the Somali Federal Government led by President Mohamed Abdullahi Farmaajo and Prime Minister Mohamed Hussein Roble rejected the deal signed by the Minister of Petroleum and Minerals, Abdirashid Mohamed. Both leaders cited government decrees and directives including a Presidential Decree dated August 7th, 2021 and a Council of Ministers Directive on December 6th, 2018 banning all ministries and government agencies from signing agreements with foreign governments and organizations until parliamentary elections were finalised.

In addition, the government instructed Attorney General Suleiman Mohamed Mohamud to investigate the contract and take appropriate legal measures. The Attorney General described the deal as illegal and summoned the Minister for further investigations.

In a letter written to Coastline Exploration Ltd by the Ministry of Foreign Affairs, the Somali government said that the agreement signed by the Minister of Petroleum was “contrary to Somali law”, citing the Procurement Act, Petroleum Act and the Somali Provisional Constitution.

Moreover, the FGS also raised concerns that the signing of the PSAs “may have been tainted with corrupt practices” as allegedly both the Prime Minister and President was not aware of the agreement. Interestingly, in an interview with VOA Somali, Coastline Exploration Ltd admitted that it did not directly communicate with both the PM and President.

Conversely, Coastline Exploration Ltd argued that they received approval from the Somali Petroleum Authority and the relevant Minister in the Federal government.

Additionally, the company made a legal case that the Presidential Directive signed by former President Mohamed Abdullahi Farmaajo did not legally supersede the Petroleum Act, which according to the Coastline was followed during the signing of the deal.

This was supported by the Somali Petroleum Authority (SPA). It rejected the criticism, saying the president did not have the grounds to comment on the deal. At that point, the Somali government’s term had ended in the run up to elections, held in May and was a caretaker government.

Is it a fair deal?

In 2021, the Federal Government was advised not to enter any oil agreements by the Financial Governance Committee (FGC), a group of experts comprising of parliamentarians, a member of the World Bank and the Federal Finance Minister.

In an advisory, the FGC said it identified two main concerns in the government’s approach to oil and gas contracts:

  • Incomplete compliance with the government’s legal framework, and;
  • Inadequate protection of the state’s financial interests.

The FGC warned that incomplete compliance will “significantly” raise the risk of future legal compensation claims against the Federal government by any oil company. Furthermore, the FGC elaborated that the inadequate protections of Somalia’s financial interests risks “poor value for money over the lifetime of awards that may last for 40 years or more”.

The FGC also said no PSAs should be signed until an extractives industries income tax is enacted. No such law has been enacted in Somalia despite the signing of the deal by President Hassan Sheikh.

Discussing the agreement, William Anderson explained “there is a 5% royalty that comes right off the top. Profit is split 50-50. There is a 30% income tax on whatever profits the contractor.” Additionally, all terms of the PSAs including the profit-sharing percentage would remain fixed for the duration of the contract, irrespective of global oil prices.

While criticised by some experts, the Somali Petroleum Authority endorsed the deal, stating that if the oil prices were to fall below $55 per barrel, “the oil company will reduce its share so Somalia’s share in fact increases in these circumstances”.

Coastline can recover costs during a certain period. However, if it discovers nothing during exploration, there are no costs to Somalia. The country also has a corporate tax rate of 30% and a capital gains tax of 20% said the SPA.

What makes the deal more interesting is its timing. It comes only a matter of weeks after President Hassan Sheikh disbanded the Independent Anti-Corruption Commission which oversaw such deals, raising eyebrows for many.

No Parliamentary Approval or FMS Consent

Many have criticised the deal because it was not put before parliament. Indeed, the role of Parliament is to hold the government to account regarding both internal and foreign policy including any deals that are intended to “benefit the Somali people”.

As Parliamentarians are representatives of the Somali people, surely they should have a right to scrutinise the deal and provide amendments to keep the government in check? Otherwise, such large scale decisions that have lucrative deals being signed by a small number of allied men will increase the possibility of corruption.

We are yet to hear a comment from the Speaker of the Lower House, Adan Madobe. However, it is not much of a surprise as the Speaker is yet to comment on numerous deals recently signed by the President including Ethiopia, Eritrea and Kenya which did not receive Parliamentary consent.

Additionally, many issues remain regarding the implementation of the Baydhabo Agreement 2018 on the management of oil exploration amongst Federal Member States.

Puntland has remained the most vocal against recent decisions taken by Mogadishu. Garowe rejected the recent procurement deal framework signed by the Joint Federal Ministerial Committee led by the Minister of Petroleum, Abdirizak Mohamed. To make matters worse, Puntland has also refused to recognise the SPA, arguing that the formation of the Agency did not follow the framework agreed upon under the Baydhabo Agreement.

While an agreement has been signed, how the agreement will be implemented and reaction from Federal Member States, particularly Puntland will be interesting to see.

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