By Dr. Hassan A. Hussein
Introduction
Oil is a basic commodity linked to nearly all human activities, and its price volatility has a significant negative impact on economic growth and money supply. The recent oil price fluctuations due to ongoing wars—Russia-Ukraine, Gaza, Lebanon, as well as Houthi attacks on oil tankers—have led to global economic uncertainty.
Oil booms and busts can stabilize or destabilize the world economy, creating confusion in economic, political, and industrial sectors, especially in developed countries like the US and China. These nations compete for control over oil and other strategic resources, markets, and political influence in Africa. Similarly, growing economies such as Brazil, Malaysia, South Korea, Turkey, and India have joined the competition for oil exploitation in Africa, often behaving similarly to their predecessors.
Although oil and gas exploration in East African countries has had a positive economic impact, it has also sparked political conflicts, especially in border areas where many oil fields have been identified. Examples of disputed territories include the Abyei region between South Sudan and Sudan, the Lamu basin between Somalia and Kenya, the Sool region between Somaliland and Puntland, and the Lake Albert basin between Uganda and Congo, as well as mainland Tanzania and Zanzibar.
The majority of new deals signed in East African oil and gas exploration with oil companies are Production Sharing Agreements (PSA). This means the government grants a license to oil companies for an exploration block, and then the company conducts preliminary seismic work to find investors who bear full responsibility for the costly drilling of exploration wells. This is known in the industry as a “farm-out,” which occurs when a company is willing to give up part or all of its current concession due to a change in management perspective on risk, budget deficit, or license expirations. In the oil and gas business, a farm-out is a decision made by license holders wishing to share part or most of the risks, lacking the capital and/or capacity to fully explore fields. Usually, the acquiring company pays a fee and agrees to do a certain amount of work in exchange for participating in any finds (Pereira and Lewis, 2017).
Offshore Oil Exploration in Somalia
The recent discovery of oil and gas in some East African offshore areas has raised hopes of immense oil and gas reserves in Somalia’s offshore. This new offshore exploration has raised hopes of a brighter economic future for Somalia, after onshore oil prospects were muted by civil war and conflict for three decades.
If oil or gas is discovered offshore in Somalia, it will mark a new era of opportunities in the Somali oil industry due to its geo-strategic location. Somalia should look for markets and investors from East Asian countries such as Malaysia, Japan, India, and China, which will be eager to gain access to Somalia’s oil and gas if its reserves are deemed viable.
Therefore, the Somali government needs to establish strong state structures with regulatory and legislative frameworks for oil exploration, production, and export. Such a setup will generate enormous revenues that will help build the country’s infrastructure (educational system, basic healthcare, and job creation). It will also enhance economic, political, social, and cultural integration to improve security and alleviate the living standards of the Somali people.
On the other hand, the oil discovery may fuel economic and political conflicts in the country if there is economic mismanagement, weak fiscal regulations, lack of transparency, corruption, and nepotism. If poor financial governance prevails, as occurred previously, the oil discovery could lead to a resource curse, causing the country to revert to conflict, civil war, and economic regression. We can recall what happened in Iraq and Libya, where high oil revenues were associated with poor governance, lack of economic and social development, lack of respect for basic human rights, and poverty amidst plenty (Hussein, 2024).
One of the biggest challenges faced in Somalia is the relationship between the Federal Government and federal states. It is a very volatile and ambiguous relationship with political upheavals and a lack of natural resource policy, ownership, and income-sharing arrangements. These issues make it difficult to exploit oil and gas. Consequently, oil exploration and production might lead to new conflicts and tensions between them, threatening peace in the country and making the resource curse inevitable. Sabotage actions to stop oil production by attacking oil workers, oil installations, and increasing sea piracy and terrorism could become unavoidable.
However, if the signed Petroleum Law is adhered to and the revenue is managed well, it will bridge the infrastructure deficit and boost investment, overcoming poverty, inequality, and providing sustainable economic benefits and prosperity. Oil extraction could be a blessing, bringing more peace and security and a better life for all, specifically through employment, roads, electricity, safe water, education, quality healthcare, higher incomes, and poverty reduction.
Conclusion
In summary, the key questions are: Will oil bring great collaboration between federal and state governments, boosting federal investment and bringing peace and economic prosperity? Or will it bring more poverty, conflict, disaster, and disintegration?
The real test will be whether the federal government follows the Norwegian model for oil exploitation or the Nigerian model, where oil has been more of a curse than a blessing. Time will tell!
Hassan A. Hussein, PhD
Email: [email protected]
———–
Mr Hussein is a visiting Research Scholar @ Khalifa University, UAE and Professor of Exploration Geology.
Reference
Pereira G. E., Lewis J. M. (2017). “Conditions Precedent in Farm-out Agreements – An Overview”, International Review of Law, Volume 2018, Regular Issue 3, Qatar University Press.
Hussein, H.A. (2024). Peer-Reviewed Academic Journal for Somali Studies, Volume 9, 2024 pp. 90-103
———–
Related articles:
The Potential of Oil and Gas Reserves in Somalia: Real Opportunity or Overstated
Hope? By M. A Mireh
Unveiling the Holhol Oil well: The Paradox of Somalia’s Untapped Wealth and Persistent Exploitation by Foreign Powers By M. A. Mireh
Potential Manpower Bottleneck in Somalia’s Oil and Gas Sector By Prof. Hassan A. Hussein
Oil and GAS Opportunities in Somalia By Arabey Hashi Abdi .
We welcome the submission of all articles for possible publication on WardheerNews.com. WardheerNews will only consider articles sent exclusively. Please email your article today . Opinions expressed in this article are those of the author and do not necessarily reflect the views of WardheerNews.
WardheerNew’s tolerance platform is engaging with diversity of opinion, political ideology and self-expression. Tolerance is a necessary ingredient for creativity and civility.Tolerance fuels tenacity and audacity.
WardheerNews waxay tixgelin gaara siinaysaa maqaaladaha sida gaarka ah loogu soo diro ee aan lagu daabicin goobo kale. Maqaalkani wuxuu ka turjumayaa aragtida Qoraaga loomana fasiran karo tan WardheerNews.
Copyright © 2024 WardheerNews, All rights reserved
