Oil and opportunities for development in Somalia

Note: A version of this article was published in the February 2019 issue of African Business Magazine.

During the 2018 Africa Oil Week, which took place in November 2018, the Somali Ministry of Petroleum and Mineral Resources announced that 206 oil blocks were available for exploration in offshore Somalia. Fifty of these blocks, an area totaling 173,000 square kilometers, will be auctioned in 2019 and the Federal Government of Somalia (FGS) invited bids from foreign energy companies. Offshore Somalia is estimated to hold around 110 billion barrels of oil, which would make it the sixth largest reserves in the world.

For a country that has been at the bottom of global rankings on the basis of transparency, human development, passport power, and safety, oil is seen as a source of hard currency to turn things around and fuel development. It goes without saying that there are downsides to the discovery of oil in Somalia. The country might slide back into violence as the various entities with interests in Somalia’s economy such as clans, corrupt politicians, and business leaders stake their claim on the new found wealth. However, the benefits of oil wealth outweigh its risks if it is meticulously managed and with foresight.

After 28 years of neglect, the country’s infrastructure leaves a lot to be desired. Opportunities for development include improving, and in many cases supplying, basic necessities such as sanitation, clean water, electricity, medical facilities, and schools. Road infrastructure such as good quality paved roads is practically nonexistent as most roads are either unpaved or nonexistent, thereby reducing accessibility. Due to recurrent droughts in Somalia, increasing access between villages, towns and cities is critical because one of the causes of famine is inaccessibility.

With potentially billions in hard currency coming into the Treasury, it would be tempting to follow what some countries have done and pump money into projects without much planning or oversight. For example, Angola’s Nova Cidade de Kilamba, a US$ 3.5 billion social housing project where the starting price for a unit is US$ 120,000 remains mostly uninhabited because it is unaffordable for most Angolans. The FGS must prioritize sensible, clean, well-maintained and accessible social housing for the 750,000 refugees in Kenya and Ethiopia that will need to be resettled back home.

Somalia is geographically well-positioned to take advantage of different forms of renewable energy.

Ironically, one sector that can benefit from oil revenue is renewable energy. Somalia can follow Norway’s example and use oil revenue to fund renewable energy projects that provide communities with sustainable and reliable sources of energy. Unlike many other African countries, Somalia is geographically well-positioned to take advantage of three different forms of renewable energy: solar, wind and ocean current.

The solar energy potential in Somalia is well-known as sunshine is an infinite resource in the country. Every year Somalia receives between 1500 and 2500 kWh per square meter of solar radiation. Wind is another resource that could be tapped because of the Somali peninsula’s location close to the Southwest and Northeast Monsoons. In fact, if 100-meter turbines are placed in the windiest parts of Nugaal, Bari or Sanaag they would produce between 750 and 1400 watts per square meter from wind speeds reaching up to 10 meters per second. By comparison, the windiest parts of Denmark, a country that generated 45% of its electricity from wind power in 2016, produce just 601 watts per square meter from wind speed of around 8 meters per second. An added benefit of wind turbines is that they can be owned by local residents and the local government can retain most of the income tax that they generate with a smaller percentage going to the FGS.

Studies have shown that harnessing a fraction of the energy available stored in ocean currents is enough to supply power to millions of people. The aptly named “Somali current”, a continuous movement of seawater as strong as 3 meters per second that runs the length of the Somali coast, provides ideal conditions for generating marine power. Incidentally, the Somali current is also the reason why the Somali Basin is one of the world’s most productive areas for fisheries, which is another sector that can be developed with oil revenue.

The travel and tourism sector would also benefit from oil revenue. Whether it is the 3025 kilometers of coastline, the pristine montane forests and rugged valleys in the north, or the tropical woodlands of the south, the Somali landscape does not lack tourism potential. Though much of it is under threat due to thirty decades of exploitation and neglect. The FGS can earmark funds for the development and maintenance of tourist infrastructure as well as reviving the national air carrier to market the country to the world. Tourism can bring significant revenue into the economy while generating employment opportunities for locals. In neighboring Kenya and Tanzania, the travel and tourism industry in brought in US$ 723 million and US$ 2.2 billion, respectively, in 2015 and employs roughly half a million people in each country. By comparison, the United Arab Emirates, a tiny desert country with relatively few marketable natural landscapes, made US$ 16 billion from 14 million tourists in 2015.

The U.S. recently pledged US$ 900 billion in development assistance to Somalia and opened a permanent mission in Mogadishu nearly three decades after closing its embassy there. With the current U.S. administration’s penchant for business deals, this could signal a headway that a future US-Somalia trade deal may be forthcoming, particularly in the oil sector. This would mean that the U.S. private sector may re-enter the Somali market as conditions improve in the country and contribute much needed foreign direct investment. However, the lack of financial transparency in Somalia may pose a challenge if the FGS is to convince the Somali people that these foreign investments are indeed good for the country.

The relationship between the Somali state and its people is marred by a lack of trust in government institutions that has developed after years of embezzlement and corruption by the political elite and their cronies. The FGS can amend this relationship by adopting a practice common in some developed countries where the salaries of all civil servants and government contracts are available to the public. This will make government operations transparent and expenditures of public funds can be scrutinized by citizens.

The Somali leadership needs to be both prudent and pragmatic. The foundation of every government-funded project must be a plan for sustainable and diversified development that will continue decades into the future. The reasons for this are simple: the supply of oil is not unlimited and oil prices are anything but stable. Relying solely on this resource is a recipe for disaster, just look at how it turned out for Venezuela.