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Shell tackles pirates for
offshore treasure

It could take 10 years for the security situation in Somalia to be stable enough for Shell to work there. (PA)
It could take 10 years for the security situation in Somalia to be stable enough for Shell to work there. (PA)

Jessica Hatcher
May 16, 2012

Royal Dutch Shell is pioneering a stabilising and state-building initiative in Somalia, one of the world’s most fragile states, where it still lays claim to offshore exploration rights more than two decades after they went into force majeure following the collapse of the central government in Mogadishu.

An anti-piracy and stabilisation programme, led by Shell Shipping, has asked industry players to contribute $500,000 each over a period of two years, and is aimed at supporting community and job-creating projects in the coastal regions of Somalia. In doing so, it intends to reduce the risk of piracy to seafarers on the Indian Ocean. BP, Maersk and participants from the Japanese shipping industry have agreed to participate, and additional contributors are being sought.

Maarten Wetselaar, Shell’s executive vice-president upstream international, confirmed to Interfax that the exploration rights to the blocks offshore Somalia are still owned by Shell – but have been in force majeure, a frozen state of unavoidable circumstance, since 1990.

The offshore rights were licensed to Pecten Somalia, a wholly owned subsidiary of Shell, in 1988 when, according to Reuters, Pecten carried out an extensive seismic evaluation of the 14.9 million acre (60,298 square km) block.

Mohamed Ibrahim, the deputy prime minister of Somalia, said it is well known that Somalia has many oil and gas deposits, but he is wary about the risks. “The difficulty is this political situation – it is not the right time for international investors to come in,” he told Interfax.

A source at Shell said they have reason to believe the area has more potential in terms of gas than oil. However, the chances of finding commercial quantities on a greenfield site are relatively low.

Huge potential

Estimates for Somalia’s offshore gas potential are unproven but as much as 100 trillion cubic feet (2.83 trillion cubic metres) has been found offshore Mozambique and Tanzania, just a few hundred kilometres down the coast. Estimates for Somali oil run as high as 110 billion barrels.

During the reign of Siad Barre, a notorious dictator in Somalia, many international majors held stakes in the country. In 1991, the year his government collapsed, the World Bank released the findings of a report on the geological hydrocarbons in eight sub-Saharan countries – and Somalia topped the list.

Two gas fields and eight exploration blocks were recently awarded to China’s PetroTrans in Ogaden, in the southeast corner of Ethiopia. The area is said to have 113.3 billion cubic metres of gas, according to Ethiopian exploration company SouthWest Energy.

Abdullahi Goodah Barre, the Minister for Development and International Cooperation in Somalia’s transitional government, has welcomed international support in stabilising the country, acknowledging that it will benefit both the international community and Somalia. “What we will not do is sell the national reserves before we are ready to sell”, he said. Barre plans to exploit Somalia’s oil and gas only when the time is right to maximise the return on extraction.

James Smith, Horn of Africa project manager for the Rift Valley Institute, described the risks and challenges for investors such as Shell as formidable, and far greater than elsewhere in the region. “Ethiopia, South Sudan, Uganda and Kenya can offer something neither Somaliland nor Puntland are currently able to – an internationally recognised government with whom to agree contracts”, he said.
Smith has noticed a pattern. “Political, security and operational risks continue to deter the global big hitters or ‘supermajors’ from returning to the region, but several smaller wildcat operators appear to be taking the first steps towards reinvigorating the industry in Puntland and Somaliland”, he said. With growing interest in the region, this could be about to change. “We look forward to returning and operating in Somalia when the force majeure circumstances are solved”, Wetselaar told Interfax by email.

Shell is the latest giant to swoop on the East African coastline, with a £1.12 billion ($1.8 billion) bid for London-based explorer Cove Energy, which would give it an 8.5% stake in Anadarko Petroleum’s 849.6 bcm find at its offshore Rovuma site, as well as other interests along the East African coastline.

East Africa is well-positioned to become a major supplier of LNG to Asia’s fastest growing markets. Shell’s Chief Executive Peter Voser said in February that the company is looking to invest approximately $30.5 billion during 2012 in new projects, and a senior source at the company confirmed that East Africa is becoming increasingly important.

Long wait

However, it could be a long time before Shell is able to take up its exploration rights in Somalia. A security expert based in Nairobi, who asked not to be named, told Interfax it would take 10 years before there is enough stability offshore Somalia for an international company to start drilling.

There is an opportunity to resume exploration in the semi-autonomous northern state of Puntland. Drilling for oil began this year for the first time in more than two decades. However, Smith warned that even investment in this relatively stable region may pose significant problems. “Puntland operators may be confronted with the prospect of renegotiating production sharing agreements with a new national administration in Mogadishu due in August”, he said.

PetroTrans was forced to abandon its plans to build an LNG facility at Berbera, a natural harbour in the northern de-facto autonomous region of Somaliland in February, because no insurer was willing to underwrite the risk.

In order to take up its exploration rights in the region, Shell would not only need to overcome security issues such as this, but would also have to renegotiate with a government largely unaware of its claims to latent exploration rights.

Asked what he thought of the chances of monetising Somalia’s offshore gas reserves in the near future, the acting prime minister at the time, Mohamed Ibrahim, speaking shortly after an international conference held in London to tackle the problems in Somalia, said: “We welcome all investors regardless of nationalities. We told [William] Hague, let the British come and explore this. He came here as a foreign secretary in a very difficult time – and we welcome all interest.”

Source: Interfax

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