The Geopolitics of Oil & Gas in Somali Territories: Ignore Ogaden and NFD at your peril

Ogaden-NFD Twin Pillar Policy: Introduction

There has been recently a flurry of activities surrounding oil & gas potentials in Somalia and drumming of interest from certain duplicitous corners with ulterior motives on perceived seismic explorations for hydrocarbon-bearing structures from the early Jurassic period.  Unfortunately many well-meaning Somalis were taken in by this manipulation.  Furthermore, many Somalis underappreciate the pernicious nature of the effects of geopolitical designs of its neighbouring countries, still less the seriousness of the desperate conditions they find themselves!  Those who surmised that Somali oil & gas exploration is effectively being tendered by Ethiopia and Kenya did not exaggerate.  We can practically divide the hydrocarbon deposits of Somalia into two, onshore and offshore, where Ethiopia is targeting onshore and leveraging the Ogaden, Kenya is targeting offshore and leveraging the NFD.  Targeting doesn’t mean here acquiring full ownership, instead it’s referring to creating conditions that allows these countries to 1) curb the benefits Somalia can obtain from its resources, 2) placing themselves as indispensable strategic stakeholders and 3) obtain direct and indirect commercial stake in the revenues from Somali oil and gas productions.  It’s an obvious strategy of containment.  The below image is showing a mock-up illustration of how this arch of containment may look like.

pip4

Although Kenya has already once managed to successfully selloff potential exploration and production rights for offshore Somali energy assets, this is not per se the focus of their strategy.  That’s why even if the ruling of the International Court of Justice (ICJ) case concerning Maritime Delimitation in the Indian Ocean (Somalia v. Kenya) is in favour of Somalia, Kenya remains confident that any oil & gas production from these blocks would have to utilize its Lamu port facilities.  So how will Ethiopia and Kenya accomplish this?  Of course, by supplying the critical logistics in the post-extraction energy transportation through pipelines routing Somali oil & gas to territories they control, the depo capacities for storage and processing refineries at well-equipped ports, which are all marketed as the safer cost effective infrastructure at disposal to western oil & gas companies managing the production.  The sad facts remains that Somali territories’ natural resources will be disproportionally controlled by its neighbours, then politically and economically leveraged to divert all lucrative value-added industrial investments away from Somalia.

Acts of Desperation: Background

Tullow Oil has moved its staff and machinery equipment out of Ethiopia after spending at least $250 million on their oil exploration projects in the South Omo basin of Ethiopia.  Tullow Oil country manager stated: “After drilling four wild cat wells in the South Omo basin we found nothing. We found only clay. Geologically, the results are a nightmare.”  Africa Oil has withdrawn its exploration operations from the Ogaden Basin after incurring millions of dollars in exploration and other costs, citing ‘concerns over reservoir quality and commerciality’ as primary reasons.  When Petronas pulled out of the Ogaden Basin in 2010, the company spent about $350 million on the exploration projects.  Within the last 10 years alone, in addition to Africa Oil and Petronas, there were many more companies such as Pexco, Lundin, Tullow Oil, etc. who all abandoned or sold their licenses in the Ogaden Basin.  From the 1930s onwards we have seen multitude of ventures including, but certainly not limited to; AJIP, Shell, Mobil, Whitestone El-Werath, Voyager, Sinclair, Cal-Teck, Tenneco, Norex, Methanol, Story, Hunt oil, Sicor, Tenneco, Spee, Gail, Midroc, SIL, ZPEB, CNOOC, etc..

Furthermore, Ethiopia has been landlocked since Eritrea’s independence, and the prospect of building pipelines in the notoriously flammable Horn of Africa made little economic sense, indeed if ever possible, to profit-oriented companies applying sensible risk management policies.  That’s because a company that borrows in the capital markets in form of corporate bond issuance, especially one with relatively sound rating, or relies on credit lines from syndicated lenders who reflect the slightest risk in the premium on interest, it would be unwise to risk all their other operations.  For reasons summarised above, Ethiopia has been desperately at work for many years now to conjure a grand geopolitical strategy with Kenya using the Ogaden Basin as their springboard.  As this strategy is multi-layered, we’ll limit this analysis to aspects that can be identified as both relevant and of geological nature.

Decades of setbacks in the pursuit of oil and gas explorations has forced Ethiopia in the first instance to adopt its disruptive geostrategic beggar-thy-neighbour policies against Somalia more aggressively.  This is pivoted in ways that maintains conflict propensity in north-eastern Somali regions at a level which is higher than the normative investment risk tolerance for oil and gas exploration companies.  Thereby allowing Ethiopia to position itself as the only viable alternative with long-term stability for purposes of developing pipelines through its territory.  Ethiopia is sending reassurances that it can guarantee safety of investments; trusting its ability to control the politics of Bantustans such as Somaliland, Puntland and Jubbaland.  However, this policy relies on having an already existing pipeline infrastructure in the Ogaden Basin which Ethiopia can use for leverage.

Current sales pitch is heavily reliant upon POLY-GCL’s planned pipeline designed to link the gas fields in the Ogaden Basin to an LNG processing facility in Djibouti which are all yet to be built.  Ethiopia sold licences for oil & gas exploration rights of the most promising blocks in Ogaden to POLY-GCL Petroleum Group, in part because it’s a Chinese state-owned company which can afford to take risks with $4 billion investments, but also because China POLY Group is a notorious conglomerate wing of the Chinese army.  Chinese embassy in Addis Ababa is now filled with military attaches and already completed all necessary formalities for their military base in Djibouti.  One of the reasons for prioritising this project is to be able to demonstrate viability of oil and gas pipelines via the Ogaden region to Djibouti as an option, perhaps sole option, for extracting and transporting oil & gas from Somalia with the guarantees enjoyed, not only from Ethiopia, but direct military presence of China!

Kenya was also attempting to persuade companies, along with Ethiopia, to abandon the functioning Sudanese pipeline and instead build a new infrastructure linking South Sudan oil fields (although now critically undermined by the security situation) with Turkana and South Omo basins through to Kenyan port of Lamu to boost LAPSSET (the Lamu Port Southern Sudan-Ethiopia Transport project).  They hoped that this would place Kenya at a comparative advantage (something that has subsequently failed) position with regards to Tanzania over their respective overtures to attract the pipeline route from Hoima district in western Uganda.  However this did nothing to discourage Ethiopian and Kenyan grand strategy because it wasn’t a vital piece to the Somali containment tactics.  Mandera Basin in the NFD region was still a sufficient strategic linchpin and is to Kenya, what the Ogaden Basin is to Ethiopia.

No sooner did Uganda announce its choice of Tanzania than Ethiopia and Kenya were on full on offensive mode announcing construction of a refined oil products pipeline deal to strongly signal their commitment to LAPSSET.  This strategy has several aims; first it sends the message that that the LAPSSET project is not dead and that there’re pipelines going to be built with or without Ugandan support.  Second, to categorically demonstrate that Kenya is able to construct a pipeline across the northern frontiers district to quell any of the concerns sighted by involved parties in the decision to route Ugandan pipeline through Tanzania.  Finally, and most crucially, Ethiopia declares to whoever is listening that it’ll exclusively guarantee its market to import refined petroleum from Kenya, hence lending credence to planned refinery under LAPSSET.

Why is that final point the most crucial?  The World Bank contracted a PwC-led consortium to carry out a study for the Government of Kenya, Ministry of Energy and Petroleum titled ‘Towards a Petroleum Sector Master Plan for Kenya’ which was published in June 2015.  This Study concluded, citing economies of scale, sophisticated chemicals integration plants in other more competitive regions and especially the aggressive expansions made by refineries in the Middle East, that Kenyan entry into the refinery market as economically unviable.  Putting it bluntly, it stated that “Kenya has neither the market scale nor industrial complexity to support a class leading refining complex capable of competing” and that “Kenya’s best economic interests would be to avoid refinery capital expenditure, and focus on becoming an efficient importer of oil products…” (Emphasis in the original)

What PricewaterhouseCoopers failed to appreciate was the fact that the LAPSSET project, and to a greater degree the refinery plant, were neither purely economic ventures, but military strategic decision sanctioned under Kenya-Ethiopia mutual defence pact as a continuation of unaltered ‘Curb On Somali Ambitions‘.  On January 5, 2016 Ethiopia’s Foreign Minister Dr Tedros Adhanom and Kenya’s Foreign Affairs Cabinet Secretary Ambassador Amina Mohamed took the unprecedented step in submitting a co-written article to Thomson Reuters Foundation to promote the two countries’ cross-border initiative.  It appears to be a direct appeal addressed to the investor communities in desperate attempts to give reassurances and attract foreign direct investment (FDI).  Perhaps underscoring the centrality of hydrocarbon politics, the co-authors quoted President Kenyatta on how he “hoped that the new initiative would help transform the region” and how the “programme will see Moyale being turned into the Dubai of Africa.”  The first paragraph of their article opens with “The Horn of Africa is blessed with vast wealth of natural and human resources…”

Prospectivity vs Practicability

Far from being anything to welcome or be excited about, potential oil & gas productions in Somalia should alarm everyone that cares about the future of Somali people.  If one is not objecting to this on moral or ethical grounds, then at least one ought to vehemently oppose this on economic and material basis because the costs of this will outweigh any benefits associated by a factor of yet unknown magnitude.

1- There’s no independent, trustworthy and credible government can be relied upon to transparently manage these resources in competent manner.  Inept and corrupt Somali politicians have already granted concessions of up to 90% of revenues from the only offshore contract licence they signed with Soma Oil & Gas Holdings Ltd.  For comparative purposes, the lowest capped offshore contracts signed by similar risk profile countries, including post-war Liberia, was 60% of profits – half as much translated in revenues.

2- These big oil & gas corporations have sophisticated operations involving transfer prising schemes that span the globe with shell companies in multiple tax havens at the same time.  So an average of 10% revenues amounts to nothing after capital expenditure (plants, machinery and other industrials), interests on loans and other operational expenses are deducted.

3- We have no reasons to believe that upstream pipeline transportation of oil & gas will not be routed to Ethiopia and Kenya, depending on locations and final investments successfully attracted to strategically located infrastructure projects; whilst at the same time we can’t say for sure that no contributing financing would come from extractive revenues from Somalia.  However we can say for sure that both countries will enjoy constant stream of income from premium charged on per barrel or equivalent transportation costs for the privilege of using Ethiopian and Kenyan pipeline infrastructure, which as income could even exceed Somalia’s revenues from its own resources!

Ogaden-NFD: Conclusions

This is an impossible topic to talk about without pausing for thought and reflecting on the crimes against humanity being committed in the Ogaden region by Ethiopia (including rape, extrajudicial killings, burning down villages, ethnic cleansing, economic strangulation and many other atrocities) ensuing displacement of which not only destroys their livelihoods, but condemning them to slow starvation.  Trade embargos is continuously expanding along arbitrarily imposed cordon sanitaire of X km radius within potential oil wells, which in the last few years included media blackout, denial of entry for aid agencies and socially engineered starvation and conflicts that are all accelerating at an ever increasing rate.  Whereas on the Kenyan side, the decision to dismantle Dabaab refugee camp is directly caused by Kenya’s desires to clear the path of any obstacles for the pipelines.  They’ve chosen to link the political instability and risk factors identified as concerns by some organisations and companies to the presence of the Somali refugees.  There’s also a lot of assassinations, disappearances and abusive use of powers by the Kenyan security apparatus which is disproportionally targeting Somalis, as far as even terrorising them in the major cities like Garissa.

The only way to counter the Ethiopian and Kenyan grand geopolitical strategies is to have a state-resourced front which is pro-actively counteracting these tactics on multiple fronts in the international arena.  For once, Somalia as state must reaffirm its irredentist identity to deter potential natural resources FDI in the Ogaden Basin and the NFD (particularly the Mandera Basin), as to send the message that these territories are still disputed to create conditions of future legal and political uncertainty risks.  However there’s little chance of that happening in the Somali political environment of present circumstances.


Contact: liban.farah@barkinka.com