Soma Oil & Gas Holdings Ltd., chaired by former U.K. Conservative Party leader Michael Howard, has proposed a deal with the Somali government that may grant it as much as 90 percent of the country’s prospective oil revenue.
A draft production-sharing agreement, obtained by Bloomberg from an official close to the negotiations, sets the state’s share of revenue on the first 25,000 barrels per day at 10 percent if found at a depth of greater than 1,000 meters (3,281 feet) and when oil costs less than $70 a barrel.
If output exceeds 150,000 barrels, Somalia’s take rises to 30 percent. Crude for delivery in June fell 0.4 percent to $57.30 a barrel at 4:45 p.m. in London on Thursday.
Any deal with Somalia will include terms that are “fair and balanced” and reflect those signed in other high-risk, offshore oil and gas jurisdictions, Chief Executive Officer Robert Sheppard said in an e-mailed response to questions on May 27.
“The proposals being discussed are in line with current industry standards.”
Somalia is trying to attract investors to help rebuild its economy after African Union-backed government forces regained control of parts of its central and southern region seized by al-Shabaab in an insurgency that began in 2006.
The Horn of Africa nation is scheduled to hold a general election in 2016, the first since 1967, according to the Heritage Institute, a Mogadishu-based research organization.
Oil and gas output may start by 2020 after exploration work showed the potential for “huge” offshore deposits, former Petroleum Minister Da’ud Mohamed Omar said in February.
The government is drafting a production-sharing-agreement model before signing any deals, the Petroleum Ministry said April 20. “Nothing has been signed and there are no developments,” Fatima Mohamed, personal assistant to Petroleum Minister Mohamed Moktar Ibrahim, said by phone on May 25 after being asked to comment on the Soma proposal.
The draft agreement calls for the London-based company to be granted a four-year royalty holiday for oil and gas found less than 1,000 meters below the sea surface.
Deeper finds should carry a six-year moratorium, the document shows. Soma also requested a moratorium on taxes for at least 10 years.
Johnny West, founder of Berlin-based OpenOil, the world’s largest public online database of oil contracts, compared the terms of the Soma PSA to nine “early-stage” offshore African contracts, including postwar Liberia, that have potentially high costs, high exploration risk and various degrees of political risk.
“None of them defer significant revenue streams to the government for as long as Soma,” he said. “The next lowest cap on upside to the government of a mega-find is effectively 60 percent of profit, half as much again as in the Soma deal,” he said in a phone interview.
Soma proposes that if oil prices are at $70 to $150 a barrel, the company receives 70 percent of revenue for the first 25,000 barrels and 50 percent on production in excess of 150,000 barrels per day.
The company also offers the government 50 percent for the first 25,000 barrels and 30 percent for production above 150,000 barrels if oil rises above $150 per barrel — which would be a record high.
“Normally, fiscal and commercial terms for petroleum exploration, development and production are carefully crafted by the host government to balance the perceived petroleum prospectivity of a region,” said Michael McWalter, an international oil and gas specialist and former adviser to the Ghanaian government.
“If oil and gas are abundant, the government takes a greater percentage of the net value of the petroleum after costs have been recovered, and conversely if not so abundant, the government takes less.”
The potential agreement with Soma would be a “terrible deal for the Somali people,” Barnaby Pace, a Somalia researcher for Global Witness, a London-based watchdog, said in an e-mail on May 21.
“All parties should heed the United Nations Monitoring Group’s call for a moratorium on all new oil deals. A dash for oil may further destabilize Somalia.”
Soma has spent $40 million on seismic surveys of 60,000 square kilometers (23,166 square miles) off the Somali coast, according to the company’s website.
In November, Sheppard said the company would give the government its processed seismic data by “late this year, early next year.”
The data will be transferred to the Petroleum Ministry by the end of the second quarter, Sheppard said this week.