You need a beer, an airline and a PSA

Author Ben Winkley

There are few places in the world more welcoming than a semi-autonomous one. Particularly if there is oil to be found, you show up to find it and then the hosts say, “come on in, sit right down and how much land do you want, exactly?”

There are few places in the world more welcoming than a semi-autonomous one. Particularly if there is oil to be found, you show up to find it and then the hosts say, “come on in, sit right down and how much land do you want, exactly?”

Exploration firms bring cash, most importantly, and a kind of legitimacy. Frank Zappa once said you can’t be a real country unless you have a beer and an airline, but he was a dreamer. Nowadays, you need a production-sharing agreement (PSA) and exploration blocks.

But the trouble is that while semi-autonomous regions may be most welcoming, they are by their very definition not entirely in control of things — they may have a degree of self-government, but it’s not complete. And this makes for an uncertain operating environment.

An exemplar of this phenomenon is Puntland, a semi-autonomous region perched on the Horn of Africa. It declared itself autonomous but not separate from Somalia in 1998, in an attempt to avoid the civil war that saw foreign companies such as Shell, BP, US independent ConocoPhillips and Italy’s Eni withdraw, never to return. Around a decade later, Puntland welcomed Canadian explorer Africa Energy into its Dharoor valley area, a move that would eventually lead to the signing of a PSA. Today, Africa Energy finally gave up on Puntland after three years of stasis caused by disagreements over the legitimacy of that PSA deal, and potential territorial claims.

Slightly to the west of Puntland lies another breakaway enclave of Somalia, called Somaliland. It is less dysfunctional than Puntland, with a working political system and government institutions, but with no more international legitimacy. Indeed, Somalia’s central government — the writ of which at times extends no further than its compound — has the same concerns about the awarding of exploration rights in Somaliland as it does about Puntland.

London-listed Genel has been in Somaliland since August 2012, and hoped to start drilling there in mid-2014, but has put its seismic campaign on hold after the security situation deteriorated.

Genel boasts that its exploration blocks in Somaliland are the size of the entire Kurdistan Regional Government (KRG) area of northern Iraq, another marginal place where it operates. The KRG is perhaps the most recognisable of all semi-autonomous entities, the one where the oil industry is most deeply embedded and where, from a distance and if you squint, everything looks pretty stable.

The region’s borders have proven mostly impervious to armed Islamist group Isis, PSAs are amicable to Erbil and the foreign oil firms, output is moving along at a steady tick and export routes are open. But trouble, in the form of legitimacy, lurks just on the horizon.

The KRG’s financing agreement with Iraq’s central government is built on unstable ground, and Erbil’s move into the international bond markets — crucial to unlocking the monies owed to the companies operating in the region, such as Genel — has not gone down well in Baghdad. The bonds would have to be backed by oil sales money — the KRG has no other collateral — and as Baghdad already considers independent KRG exports as illegal sales of Iraqi sovereign assets, this has the potential to cause financial and political stress for those foreign oil companies operating there.

For more information, please contact OilBlog@argusmedia.com

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