A comparative review and technical analysis of the Petroleum Policy (2015) & the Upstream Petroleum Act of Somaliland (95/2021), examining its salient features and attractive offerings for the nation and investors.
Preface
In September 2019, and for the first time, we landed in this blessed land of milk and meat abundance as the third generation of diaspora based Somalilanders since we were born and raised in Arabia; so is our Adeni parent and grandparents. As we arrived, we were equipped with tons of excitement and eagerness to contribute to the future economic awakening of the Horn of Africa inhabited by the camel herding Somalis and to be part of the continent’s economic development through better utilisation of natural resources. We immediately joined the Ministry of Energy and Mineral of Somaliland. We got involved with the progressing extractive resource legal and regulatory fiscal frameworks in two facades the Somaliland Mining Act for minerals and the Upstream Petroleum Bill and Upstream Petroleum Policy for the Oil and Gas. We contributed to both, to the best of our ability, knowledge and experiences.
Before we Xray Somaliland’s legal and fiscal framework for the extractive industry, let us warn ourselves that in several countries in Africa, the discovery of natural resources is a missed opportunity. Instead of the natural resource endowment becoming a vehicle for social and economic development, it becomes a resource curse. Those countries end up far worse than before the discovery was made due to corruption, inflation, instability, civil unrest and a negative macroeconomy. While in the other hand, fewer countries avoided the resources curse and translated the discovery of natural resources into blessing right from the beginning to the end when the resources depleted. In the journey, they created a better macroeconomy, jobs, infrastructure, and most importantly, safeguarded their environment.
Introduction – Looking from a bird’s eye view!
Immediately after the post-colonial era, the entire continent of Africa went through an aggressive overhauling and harmonising evolution for better extractive industry legal and regulatory fiscal governance policies. Some countries introduced newer legal and regulatory fiscal regimes at their national levels, while others collaborated and established one standard regional extractive policy. For example, the 16 member states of the Southern African Development Community (SADC) as a Regional Economic Community devised a common and harmonised reform to improve their legal and regulatory framework to enhance the inflow of foreign direct investment into their region. They established one standard mining protocol with several interventions like collaboration on geology, mining policy, harmonisation of policy, laws and regulations, and finally establishing centres of excellence for capacity building.
Similarly, the 15 member states of the Economic Community of Central and the West African States (ECOWAS) also followed suit and established a mandatory, standard and harmonised extractive policy directive. The above led to creating a continent level extractive directive called Africa Mining Vision, found and adopted by the African Union head of states in February 2009. African Mining Vision aim was to become the vehicle for the continental framework for ensuring that extractive industry becomes the catalyst for broad-based economic development for the continent and the continent and its people benefit from the rising commodity supercycle. The Africa Mining vision’s main goal was to ensure the natural resources endowment of the continent benefit the general public and directly contribute to the structural economic transformation of the continent.
The fundamental tenets of Africa Mining Vision are a broader definition of benefits beyond the revenue streams, optimal use of mineral revenue through good governance and management, and establishing a resource-based infrastructure that benefits the other economy streams.
So, it is natural that Somaliland also joins the race for better legal and regulatory fiscal frameworks for its startup extractive industry nearly two decades since it has established its Ministry that oversees the extractive industry. The recent scramble for Mining and Hydrocarbons contracts like Genel Energy, RAK GAS has pushed Somaliland to the spotlight as a significant potential petroleum producer for the near future. The looming question that remains on all Somaliland citizens is, “How can our nation translate and transform these possibly possible hydrocarbons discoveries into economic success?”. In contrast, every citizen wishes that the Upstream Petroleum Act & Petroleum Policy of Somaliland effectively manages the extractive resource revenues for the common good.
The Upstream Petroleum Act (95/2021) & Petroleum Policy (2015) has become the legal framework that governs overall potential hydrocarbon extractions and set the new age for Somaliland’s oil and gas industry. The Act and Policy will establish ‘transparency and ‘accountability in the oil and gas sector by reinforcing the governing institutions to comply with the nation’s rules. In this brief review, we will try to Xray and dissect the latest Upstream Petroleum Act and the Petroleum Policy of Somaliland. We will highlight the most salient features, gaps, and possible improvements, so Somaliland does not waste the one chance to succeed and avoid the ever daunting and looming resource curse.
Both the Upstream Petroleum Act and the Petroleum Policy are inherently the same, with some underlying differences. The Upstream Petroleum Act (95/2021) will govern the upstream petroleum activities, including procedures for fiscal rules, licensing, production, decommissioning, environmental well-being, penal provision, awarding of licenses, and entering into exploration and production sharing agreements. This Act aims to establish a legal framework for the government to manage the State’s petroleum resources with full transparency while remaining impartial. At the same time, the Petroleum Policy (2015) aims to establish a broader governance tool for upstream petroleum activities.
Xray-ing the Upstream Petroleum Act (95/2021) and we will group it into five major vital categories:
- Areas for Petroleum Activities and Production Sharing Agreements
In this section, we examine the fundamental structures that set up the Production sharing agreements and also the contest for the areas with potential:
Before initiating any petroleum activities, the Minister of Energy and the environment minister shall conduct a strategic environmental assessment with the internationally accepted protocols. The strategic environmental assessment shall include an appraisal of the impact of the petroleum activities on trade, industry and the environment and the social effects that may arise from the upstream petroleum activities.
The Minister shall then prepare a reference map showing the geographical area of land the State divided into blocks. The surface should be divided into blocks of 30 latitude minutes and 30 longitude minutes in size unless adjacent land areas or other circumstances warrant otherwise. Geographical coordinates shall define any site awarded for a license or an exploration and production agreement.
Suppose the Minister declares an area open for exploration/petroleum activities after conducting the strategic environmental assessment. In that case, the Minister may then grant a license for a reconnaissance site within a precisely defined area to a qualified entity. No preferential rights shall ever be given to any entity, and when granted, be set for up to 2 years.
In the case of competition for a block, the Minister may decide and hold a competitive public tender or auction round to grant an exclusive reconnaissance area. This whole reconnaissance area will also last for two years.
The Minister may announce to invite oil and gas companies to participate in a competitive round for exploration and production sharing agreements. Applicants must meet the minimum requirements for financial and technical capacity to carry out work obligations and apply for an exploration and production sharing agreement to be submitted to the Minister according to the regulations set. The applicant will pay an application fee which covers the costs for the State to properly assess the applicants, including the costs for hiring external evaluation.
The Act stipulates that the exploration and production sharing agreements shall include two phases:
- An exploration phase not exceeding ten years
- A production phase not exceeding 30 years
The content of the exploration and production sharing agreement that all contractors shall abide by are as follows:
- The geographical coordinates of the awarded agreement area.
- If several contractors, the allocation of participation interest between these.
- Section 18 (2) of this Law stipulates the duration of the exploration and production sharing agreement and its sub-phases.
- The Act also sets the minimum work obligations and expenditure commitments for the exploration phase.
- Provisions concerning any State participation;
- The Act also sets provisions concerning environmental conditions which address specific issues for the area awarded.
The Upstream Petroleum Act has also set mandates for relinquishments and the right to surrender. A contractor may only abandon their exploration and production sharing agreement after achieving the minimum work obligation and settling all other financial fees. In the case of the discovery of other natural resources, the contractor must notify the Minister.
- Development, Production and Decommissioning
In this section, when the contractors make a discovery, the different stages of activities are:
When the contractor makes a discovery, the contractor shall notify the Minister within 48 hours after the date of such natural resource discovery. The operator/contractor will then have to submit to the Minister for field development plan per the terms of the Law. The approval will be an onus on the Minister, but if the planned expenditure exceeds $50 million, the authorisation will be on the Council of Ministers.
The two sections of the Field Development plan are:
- To first conduct an environmental impact assessment (According to the Act)
- Developing petroleum reservoir resources
If accepted, the contractor or licensee will then be responsible for laying out the pipelines within the agreement area. No test production shall occur without the approval of the Minister.
Several laws have been stated in the Upstream Petroleum Act when a situation arose that a petroleum reservoir extends across the line from the agreement area into another. Contractors will be required to agree on the most efficient and coordinated way to secure optimal recovery. Contractors will then enter into a Unitisation Contract. Contractors from two or more adjacent areas containing petroleum reservoirs may agree to operate jointly.
The Law also address a “Decommissioning Plan”. Under the Law, contractors shall present to the Minister at least three years before a planned surrender of the exploration and production sharing agreement. A decommissioning fund should be set aside by each contractor for each petroleum field. The State will then ‘free of charge” take over the ownership and right to use facilities if the exploration and production sharing agreement is surrendered or terminated. Upon takeover, the State will then take ownership of the funds dedicated to decommissioning.
- Entitlement, Fees, Taxes, Health, Safety & Environment.
In this section, we inspect the fiscal and environmental regime of the Act:
Before the commencement of activities, the contractor shall pay a fee for the area for exploration purposes in progressive and calculated per square kilometre and will differ based on whether the site is offshore on onshore. A royalty fee is payable for each barrel produced before any costs are deducted and paid to the government in cash or kind. Petroleum prices shall be determined using procedures established by regulations and based on oil prices acquired from independent parties in the global market for petroleum of equivalent grade.
Contractors and licensees engaged in petroleum operations on the State or region and coastal waters are subject to the taxes and levies imposed by Law. The Petroleum Revenue Law governs all fees, royalties, bonuses, and other payments to the State linked to petroleum activities.
Before conducting any petroleum activities, a licensee or contractor must document a health and safety plan according to prescribed regulations and preserve it at the worksite. A safety plan capable of adequately dealing with fire, oil spills, blowouts, accidents, or other emergencies to prevent or control such situations and minimise loss or damage. Suppose a licensee fails to carry out petroleum activities safely and the best available international techniques and practices prevailing in the petroleum industry in comparable circumstances at any time. The Minister will seek reimbursement from the faulting licensee or the contractor for the costs and expenses of the faults.
- Miscellaneous Provisions
In this section, we examine the different types of variations in the Act:
Except for army sites where they have a license to carry out petroleum activities, the government, contractor, or licensee shall have the authority to enter any area. They can enter provided that:
- All entities that have some claims in the worksite on which activities are to be carried out; must be informed of the purpose, nature of the proposed operations before starting such operations;
- If an entity claims legit title or interest on a worksite and suffers a loss or harm due to the petroleum operations is entitled to compensation. The appropriate regulations define all the temporary or permanent expropriation and compensations.
- The compensation will be computed based on the land’s worth before the start of the petroleum activity.
The Law requires the Licensee/Contractor to have recognised insurance to cover all their petroleum operations. The insurance must at least cover:
- Damage to the facility.
- Damage caused by pollution and environmental hazards. Also, other third parties liabilities.
- In the case of Petroleum accidents, the contractor and insurance must remove all physical remains and eliminate hazards.
- Licensees’ and contractors’ employees engaged in petroleum activities.
- Penal Provisions
Under this section, we shall look at the different penalties that occur for the contractors that disobey the Law:
Non-compliance with the mandates of the Act attracts heavy penalties, including fines and jail terms for those responsible for any wrongdoings/ not obeying the Law.
Some of those law offenders are as follows:
- engages in petroleum activities in Somaliland without the Ministry of Energy and Minerals’ permission.
- Conducts petroleum exploration in Somaliland without obtaining an exploration license.
- Engages in any activity that requires a permit as defined by this Act and its rules.
Has committed an offence and is punishable with a fine of Somaliland shillings equivalent to 500,000 US$ (Five hundred thousand United States Dollars) or an imprisonment term not exceeding ten years and not less than three years or both.
Those who engage in petroleum activities in a manner contrary to the provisions of this Act and its regulations have committed an offence and will be subject to a fine of $50,000 US$ (fifty thousand United States Dollars) or imprisonment not more than three years and not less than one year. Anyone who begins to implement a field development and operation plan without the Ministry of Energy and Minerals’ approval has committed an offence and is subject to a fine of $1,000,000 US$ (One million US Dollars) and a payment of $200,000 US$ for the duration of the operation.
Whereas the Upstream Petroleum Act lays down the groundwork and foundation for the successful extraction of the resources, the Petroleum Policy applies down the tools to enforce such laws. It addresses the need for a NOC (National Oil Company) to successfully engage on behalf of the nation to control the petroleum sector better. Somaliland has no established National Oil Company, and it needs to establish one governance tool for the petroleum activities on behalf of the nation.
The policy also follows up on the need to differentiate petroleum activities that occur offshore and onshore, improve our nation’s local content (employees/workforce), and address the health, safety, and environment.
The petroleum policy also addresses the different approaches to capturing resource rent. Somaliland will use the production split model using the R-factor. Several countries in the region use such as Algeria, Tunisia, Colombia etc. It allows the government to bear no risks and collect royalties from an IOC (International Oil Company)/Contractors.
Our parting conclusion and observations.
As two specialists in the oil and gas sector and careful and detailed analysis done here, the Upstream Petroleum Act & Petroleum Policy seems highly likely to create the foundation for sound management of the country’s hydrocarbon resources.
- Due to the high demand for petroleum and the need for the good governance of Somaliland’s potential and untapped natural resources, the Upstream Petroleum Act (95/2021) and the Petroleum Policy (2015) will set the stage for substantial transformative growth for the country by ensuring a higher and sage government take. The government has done its due diligence and laid the groundwork for the legal and fiscal framework to successfully extract our untapped Oil and Gas potentiality.
- The Act and Policy seem to set a precedent that will be followed and improved for years to come; however, gaps and conflicts will still occur within the Act, and time will refine the processes.
- Somaliland should look to implement the EITI (Extractive Industries Transparency Initiative) and join them to set the global standard for the good governance of oil and gas resources. Our African counterparts Tanzania, Nigeria, Uganda, and many more, are all Extractive Industries Transparency Initiative members.
- Furthermore, the Upstream Petroleum Act (95/2021) and the Petroleum Policy (2015) introduce a range of new actions that must be abided by, by the upstream operators/contractors. The successful implementation will require the various ministries to function as one and protect the nation’s resources to facilitate sustainable use and management. It will require all ministries’ collective effort and collaboration, mainly the Ministry of Energy and Minerals and the Ministry of Finance, to oversee if the Act and Policy got implemented and followed by all.
- Further strengthening the legal framework with ring-fencing, capital gains taxation, income measurement, thin capitalisation and narrowing scope of the stability clauses.
- R-Factor: That allows the government’s petroleum share to increase with the ratio of contractor’s cumulative revenues to contractor’s incremental costs (‘the R Factor’).
- Rate of Return (ROR): That allows the government’s profit petroleum share is linked to reference to the cumulative contractor rate of return achieved until the period of sharing.
- Transparently get engaged with the public and manage the tremendous public expectations associated with attractive resource contracts, especially when announced significant discoveries.
- Capacity building for the local workforce; encouraging local social and economic development; reducing regional inequality; finally, securing buy-in from all communities and avoiding conflicts.
Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialised in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.
| Mohamed Feysal HawarExtractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.
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Mohamoud Feysal HawarExtractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.
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