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Chinese After Oil In Somalia.

CNOOC's willingness to strike an oil deal with the fragile government of Somalia, which has been a failed state for more than a decade, has provided stark evidence of China's willingness to brave terrain which Western oil majors deem too treacherous. The state-owned Chinese oil giant has signed a PSA with the transitional federal government in the east African country, which ranks as a high-risk frontier even in an industry well accustomed to dangerous environments.

In doing so, CNOOC and its smaller partner, China International Oil and Gas, are gambling on three points. First, that the interim government has the authority to make such deals and will stay in power. Second, that violence stemming from perennial inter-clan conflicts and more recently Neo-Salafi extremists affiliated to al-Qaeda will not derail its work. Third - most fundamentally - that the country has oil worth extracting. In the 1980s several Western IOCs said Somalia had big petroleum potentials and held E&P concessions there. But they fled in 1991 when the overthrow of dictator Muhammad Siad Barre ushered in 16 years of chaos.

Ali Mohammad Gedi, Somalia's interim prime minister, in July said ConocoPhillips, Chevron, BP, Shell and ENI would be invited to return and change their concessions into PSAs under an oil law due to be published in September. BP, Shell and ENI say they still consider the concession deals to be subject to force majeure - code for unexpected and disruptive events which prevent contractual obligations from being met.

Thomas O'Connor, chairman of Benchmark Oil and Gas and a former World Bank oil engineer who studied Somalia, on July 28 was quoted as saying: "Many of the companies there in the 1980s have been subsumed into others and the bigger they get the more conservative they become. The super majors will likely talk about it internally, but my guess is the legal counsels will say 'No, let's wait until the dust settles'".

Chris Brown, a sub-Saharan Africa analyst at Wood Mackenzie, a consultancy, says: "The big issue at the moment is there are three different governments issuing exploration contracts, hence the legitimacy of these licences may be thrown in doubt if there were to be any change in the political landscape".

The government of Somaliland, a northern province which considers itself independent, signed a PSA with Ophir Energy in 2003. The government of the semi-autonomous Puntland province has given Range Resources of Australia and Canmex Minerals of Canada joint E&P rights in a part of the region. CNOOC's deal covers another part of Puntland and was endorsed by President Abdul Lahi Yousuf Ahmad, who hails from the province, even though the transitional government's authority there is tenuous. The prime minister himself has questioned the validity of the Chinese agreement because it was signed before the new oil law was in place.

O'Connor said: "Big oil companies are loath to go into dodgy areas where they don't have good contractual relationships. But the Chinese are taking the view, 'Let's just do it and deal with the consequeces later'. It's buccaneering".

CNOOC has acquired a reputation for risk-taking - a reflection of the fact it is ultimately serving China's strategic need for oil rather than purely commercial objectives. Insecurity in Somalia was underlined recently when the reopening of a conference intended to promote reconciliation between the country's clans, warlords and political factions was marred by Neo-Salafi bomb attacks which killed at least five children near the Mogadishu venue.

Range Resources estimates that Puntland has the potential to yield 5-10 bn barrels of oil. The US Energy Information Administration, however, says the country has no proved oil reserves. There has been no proper drilling for oil in Somalia.

About 10,000 people fled the Somali capital in just one week in July. The UN High Commissioner for Refugees (UNHCR) on July 23 said even those who had returned to Mogadishu were heading out again, fearing for their safety, adding: "The prospect of still another round of heavy fighting has set many civilians on the road once more".

Mogadishu has seen little peace since government troops backed by Ethiopian forces - the latter backed by the US - drove a Neo-Salafi Islamist movement out of the city in December 2006. Roadside bombs, attacks on government installations, assassination attempts and gun battles have become common, and civilians are often caught in the crossfire. Fighting in March and April forced about a fifth of Mogadishu's 2m residents to flee for safety, and the UNHCR on July 23 said only about 125,000 had returned.

Most those fleeing the capital were from districts near the hall hosting the national reconciliation conference - aimed at helping the country heal the wounds of 16 years of conflict. The meeting was delayed several times due to violence and infighting, and had been the target of regular insurgent attacks since it opened on July 18.

The Somali Neo-Salafi insurgents are linked to the Council of Islamic Courts, which ruled much of southern Somalia for six months last year. The insurgents have vowed to launch an Iraq-style guerrilla war unless the country becomes an Islamic state. The government was formed in 2004 with the help of the UN, but has struggled to assert its authority.

The East African oil potential, on the other hand, is on the radar screens of the IOCs. The political prospects there would change for the better if the Western powers manage to pacify the region's trouble zones, such as the Horn of Africa.

Potentially-rich areas there include Lake Albert, a massive stretch shared by Uganda and the Democratic Republic of Congo (DRC - ex-Zaire), where Tullow Oil of the UK and Heritage Oil of Canada have found 250m barrels in three Ugandan blocks. They are aiming for 350-400m barrels to back a 1,500-km crude oil export pipeline to the Indian Ocean through Mombasa.

Tullow and Heritage have oil E&P blocks on the DRC side, where the government set up an oil ministry in February to tender several areas. DRC's only oil producer is Perenco, a French E&P independent with an output of 25,000 b/d.

The island state of Madagascar is rich in heavy oil and bitumen. Mozambique has proved to be rich in natural gas, which is partly geared for the neighbouring South African market.

In both very deep and shallower waters on the African side of the Red Sea, the prospects for large oil and natural gas reserves have been said to be considerable. But they have not all been studied properly in areas south of the Egyptian sector. Some of these areas have been studied already by a number of IOCs. Companies have moved into Ethiopia and others are considering Eritrea.

An area in north-eastern Sudan disputed by Egypt, and its offshore, are said to be rich in oil and natural gas.

The West African prospects are among the best in the world and the US there is leading Western powers to maintain stability. This is despite the fact that oil output in several countries there is declining and new discoveries are not likely to help in the coming years. Among these are Equatorial Guinea, Gabon and Cameroon.

In Equatorial Guinea crude oil and condensate production is being forecast to fall from 390,000 b/d this year to 350,000 b/d in 2010. Gabon's crude oil production is to fall from 260,000 b/d to about 230,000 b/d in 2010. Output in Cameroon is to fall from 85,000 b/d this year to about 60,000 b/d by then.

These three countries are rich in natural gas and condensates, with Equatorial Guinea having a 3.7m t/y LNG export venture under construction on Bioko island. Marathon of the US, the operator of this venture, is to expand the plant's capacity with additional gas to be supplied by these three countries.
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Publication:APS Diplomat News Service
Date:Aug 13, 2007
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