• Business 7

Oil find could reset regional balance

- 2023-01-31 00:00:00

The presence of oil in Somaliland has been confirmed by a recent exploration, raising the stakes in the region’s claim for independence from Somalia as it holds the potential for a new stream of revenue for the semi-autonomous state.
In 2020, Norwegian seismic survey company, TGS, estimated that the Somali basin as a whole likely holds offshore reserves of about 30 billion barrels, with additional onshore reserves, although land estimates are considerably less consistent.
Assessments generally include Somaliland and would place Somalia reserves at about the same level as Kazakhstan, which would give the area the 18th or 19th largest reserve globally, as assessed in 2016.
Geological conditions seem to support the view that there are likely to be commercially viable deposits in the region. Whether they prove close to estimates remains unknown at this stage.
There is also evidence of offshore (undersea) reserves in the region, as well as onshore (beneath the land) in the Somali region of the neighbouring Ethiopia. Bordering Somalia, and located next to Oromia Regional State, the Somali Regional State (also Ogaden) is Ethiopia’s second largest federal region.
WHY HAS IT TAKEN SO LONG?
This find is being billed as the first discovery in Somaliland but in fact there have been several instances of oil seepage.
An oil seep occurs when geological or unrelated human activity results in oil “seeping” into the ocean or onto land. In such cases, the physical appearance of oil occurs unexpectedly rather than as a result of deliberate exploration.
It is unsurprisingly taken as evidence of a substantial reserve that is close to the surface, but doesn’t always indicate the presence of commercially viable quantities or accessibility.
Genel Energy, the UK oil exploration firm on whose concession this discovery occurred, has held rights to explore in Somaliland since 2012. So the find isn’t quite the sudden and unexpected bonus that’s been implied by some reports.
Progress has been slow because Somaliland’s lack of international sovereign recognition creates an uncertain context for significant investment. Somalia still claims sovereignty over Somaliland even though the region has operated as a fully if informally independent state since 1991.
This creates a vacuum.
The Somali federal authorities cannot enter into meaningful agreements over exploration or extraction in Somaliland. Somaliland is limited by investment risk. And Somalia’s threats and complaints emphasise that risk.
This has not stopped Somaliland from entering into agreements, but it has slowed activities taking place under them.
DISPUTES
In addition, there have been disputes within Somaliland over how the proceeds of hydrocarbon exploitation would be shared.
One of the areas with significant potential is the Nugaal Valley, which stretches across the border of eastern Somaliland into Puntland.
Genel Energy was already exploring in that zone a decade ago. It withdrew for a time in 2013, citing security concerns. In the same time period, Africa Oil secured rights from the Puntland administration that overlapped with those issued by Somaliland to explore in the Nugaal Valley.
A 2014 United Nations report expressed concern that hydrocarbon exploration in the Nugaal Valley risked fuelling violent conflict. Africa Oil ceased active operation in the area a year later.
The most recent find is in a different area of Somaliland: Salaxley in the Maroodi Jeex region, which is less politically volatile. This makes it more likely that Genel Energy will be able to advance its work.
CHALLENGES
The uncertainty created by a lack of international recognition makes it difficult to mobilise sufficient investment. And there is little doubt that Somalia will continue to remain hostile to both exploration and extraction.
Similarly, local sensitivities around the sharing of financial rewards will need to be managed with care and deep local engagement.
Some commentaries have suggested that the newly discovered oil could be abundant. But the reserves could also prove limited and may present technical challenges in extraction. It is therefore possible that extractive plans will operate at the margin of financial feasibility.
The latest find was the result of an accidental release of oil during drilling for water rather than from deliberate exploration.
This may be evidence of a significant and easily accessed reserve, but seepages and strikes like this have happened in the past in Somaliland. A more extensive geo-seismic surveying will be needed before the full extent of the reserve is confirmed.
POLITICAL IMPLICATIONS
I had previously studied the place of oil in Somalia and its breakaway states .
Somali society is kinship-based. Specific groups identify with particular geographic areas. This means that the political implications vary sharply depending on the location of any oil discovery.
Previous experience of exploration in the Nugaal Valley showed how socially and politically volatile the exercise could be.
The area of the latest find, around Salaxley, is likely to prove less volatile.
Unlike the Nugaal Valley, Salaxley has not customarily been subject to the same inter-clan and political disputes. But there will still need to be significant negotiation over sharing of the proceeds of exploration.
The government will be keen to ensure that the windfall advantages those in power. Local clan groups will be keen to ensure there is a clear benefit accruing to their communities. Other clans will equally want a say in how increased wealth benefits Somaliland as a whole.
Depending on how negotiations conclude, there is potential for this clan-based process to mitigate the “resource curse” effect.
In other words, the system of inter-group negotiation that underpins Somali society might provide some protection from the narrow economic impact of oil wealth that has been felt elsewhere. However, that is by no means certain and the process of negotiation itself has the potential to fuel violence, just as the UN worried in 2014.
Either way, the Somaliland economy remains tiny. Any influx of significant new wealth, even on a fairly modest scale, will create new social, economic and therefore political tensions.
REGIONAL DYNAMICS
The regional impact will depend on the extent of the discovery.
Somalia has consistently objected to hydrocarbon exploration in Somaliland as all concessions have been granted under Somaliland legislation. It would object even more strongly to commercial extraction.
Ethiopia’s interest is likely to be more equivocal. Salaxley is close to the Ethiopian border, and not far from active hydrocarbon exploration concessions in Ethiopia’s Somali region.
If the Somaliland reserves prove to be extensive after a technical appraisal, it would suggest that those in the adjacent Ogaden Basin are also significant. In this case Somaliland and Ethiopia would hold a mutual interest in ensuring sufficient regional security to enable extraction. – The Conversation
* Michael Walls is a professor of development politics and economy and DPU director of the Faculty of the Built Environment at the University College London (UCL), in the United Kingdom.