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Surmounting oil industry challenges

BY Nzivo Mutune

As much as extractive industries are rewarding, they carry along challenges that can at times seem insurmountable. Getting hydrocarbons to the surface is capital intensive, requires high-end technology and highly skilled manpower.

Once the petro-dollars start flooding in, sound financial management skills and good political will is called for in order to use the opportunity to safeguard against the volatility of the industry, invest in the welfare of the people, diversify economies while at the same time saving for future generations.

Somalia, a country that is in the process of recovering from a prolonged conflict, collapsed institutions and now the menace posed by al shabaab, the challenges they face in building and developing the oil industry can not be overstated. In the Niger delta, Nigeria, incidents of burst pipelines by locals who feel left out of this national cake, among other related attacks are not new. When oil is discovered and Somalis don’t feel ownership of the resource as well as a fair share of the revenues, if the locals aren’t employed where applicable, then the safety of the pipeline and the moving of crude oil to the refinery will be difficult. We have seen this in many countries in which the communities vandalize the pipeline and refineries are attacked.

When drawing up agreements, international oil companies always take into consideration the risk factors of the venture. The more the risks the less the share of profits the host country gets. Many analysts have posed the question of whether oil discovery is going to be a boon or bane of the Somali nation. Partly this question arises owing to the opaque legal, constitutional and property rights in Somalia. The Somali government is addressing the legal and constitutional matters dealing with the ownership of the natural resources. The government has drafted an interim resource sharing agreement. It is intended that the federal government and the regional member states will agree on the ownership and sharing of revenue generated. Corruption is a cancer that has eaten away into public coffers of many countries, exposing the masses to abject poverty. Many governments with tons of petro-dollars have the majority of its population living in less than a dollar a day. Corruption happens to be one of the sinkholes through which these monies never see light of the day.

A human rights watch group in Angola estimated that between 1997 and 2002 more than $4b of state oil revenues “disappeared” from the Angolan treasury.

Noting that corruption is an issue within Somalia, the government has introduced Public Procurement, Concessions and Disposal Act, which lays down principles and practices of public procurement hence creating a foundation for transparent financial governance. Additionally, the government is the process of joining and domesticating Extractive Industries Transparency Initiative, this is an initiative that advocates for transparency in all dealings between the oil company and the host country. This way the citizens are away of how much oil is extracted, durations of agreements, fees, rents and taxes collected, and any other details concerning the oil industry.

It is worth noting that whereas extractive industries are capital intensive, they are not pro-poor. They do not employ masses. These industries require highly skilled labour and unfortunately countries with new oil discoveries lack in these areas. Hence international oil companies normally come with their own manpower. The unskilled labour required is barely enough to cover the host country’s population.

Sectors such as manufacturing, farming and livestock and fisheries are propoor. They employ a lot. This way they improve livelihoods of the masses while at the same time cushioning the country against the volatility of the finite hydrocarbons.

It is against this understanding that the government of Somalia is working on diversifying our economies. Embracing technology will reinforce traditional industries such as agriculture, livestock and fisheries. While doing this we will be working on others sectors so as to have a healthy sustainable economy.

Against expectations, countries with huge deposits of natural resources normally post a poor human development index with many of its populace living in less that a dollar. Referred to as resource course or the paradox of plenty, it has bedeviled many countries including Nigeria, Angola, Democratic Republic of Congo and Chad among others. The Somali government is committed to establishing a shared vision towards petroleum sector development while introducing solid legislations and implementation of transparent policies.

After two decades of infighting in Somalia, its road infrastructure is in shambles though concerted efforts are underway to restore its infrastructure.

This requires time and huge capital. It is undeniable fact that Somalia’s limited budget is not sufficient for this heavy financial investment. For now, Somalia will have to make do with what we can work on.

Somalia adopted the federal system of government. There is the central as well as the regional governments. Some of the regions are Somaliland, Jubaland, Puntland among others with the central government sitting in Mogadishu.

Unchecked this tiers can be in conflict with each other owing to opposing interests or varying ways of doing business. Under such circumstances its endowments would fuel retrogression as opposed to oiling development.

To overcome these challenges, the federal government, regional authorities and communities need to agree how to share and benefit from Somalia’s natural resources. Oil being a national heritage need to benefit current as well as future generations. Enough countries have set up future generations fund to address this issue. This requires good will from the government’s elite. The Somali government, through the interim resource sharing agreement that it is proposing will ensure that future generations benefit from this finite heritage.

It would be counter productive to consider going into oil exploitation without considering inevitable environmental issues. Alive to this, the government of Somalia is in the process of setting up an environmental institution to deal with consequent environmental issues. You will recall that oil exploration dates back to the 1940s to late 1980s. Contracts had been signed between these international oil companies and the then Somali Government. Following the collapse of the then government in 1991 many companies declared Force Majeure.

Force Majeure is a clause within the agreement that protects the parties against circumstances beyond their control to deliver or see through the terms of the contract.

Due to the change of circumstances in Somalia, companies that had declared force majeure are coming back to resume operations. Shell and Exxon Mobil is an example.

Ministry of Petroleum and Mineral Resources is negotiating with the prior holders on how to lift the force majeure and resume operations.

Since most of the pre-1991 contracts were concession type, the challenge is upon the government to convert previous contracts from concession type of agreement to Production sharing agreement (PSA ).

Is Somalia ready joining oil producing country. It’s a space worth watching.

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