WHY EXTRACTIVE RESOURCES AUCTIONING IS VITAL, AN IN-DEPTH REVIEW TO SOMALIA’S RECENT CASE OF VERIFIED RESOURCE AUCTION!

Daring to be optimistic for the Somali race! a richness without borders through a vast program of natural resources extraction with good economic governance that includes full transparency!

Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes. Both are currently attached to the Ministry of Energy and Minerals of Somaliland, as Extractive Resources Economist (Upstream Petroleum & Mining Economist ) / Adviser.

Extractive natural resources are ever depleting and non-renewable sources given by the Almighty Allah during the geological formation of the universe or during the long passage of life itself, therefore as a one-off, ever depleting and non-renewable, one must use it wisely and for the benefits of the society at large. The history and the processes involved with the exploitation of the extractive natural resources is not so kind, and as the coins offer only two distinct faces, the doom, destruction and corruption without borders or the boom, benefits and richness without borders!

Somalia located on the horn of Africa and just emerging out of 30 years long civil unrest, and rightly in their eagerness to jump-start their economies inline the famous Somalia wise adage “Biyo Sacabadaada baa looga Dhergaa”, meaning one could ever get a bellyful of water through his own hands and hard labour, has recently announced that seven of their offshore blocks in the southern side of the country are available for licensing rounds grabbing to exploit the vast untapped resources that lay on its rich land. This serves as a benchmark for Somali history as this is the first time in its history of implementing the use of the institutional technology “verified auctions” to grant the right for resource extraction. Only time will tell whether this is the route for Somalia to pursue and whether the benefits of carrying out verified resource auctions is very beneficial rather than detrimental to the general citizens.

Severe negative implications can be seen in many third-world countries who fail to adhere to international standards and transparency when dealing with the governance of their natural resources and this creates negative economic consequence, resources depleted without any beneficial economic gains, at times far worse economies than before their started exploitation, and finally inevitable leads to instability in the long run. Some scholars in the economic and social development domain argue that oil discoveries in most of the African regions will lead to a resource curse as the prevailing corruptions in Africa seem to be higher than the rest of the world, the lack of strong financial institutions and lack of sane public finance governance will allow the greed of the higher hierarchy of the society and leadership to benefit the most by fully controlling such a wealth.

A major finding by the world-renowned economist from Oxford, Paul Collier, the author of the Bottom Billion book states that major boom of resources in a country usually lasts for a  period of five to seven years (which is considered in the short-run) and dwindle after that. It has historically been proven that countries have suffered worse than if they had not exploited those resources, the appropriate term to be used in these situations is the “resource curse”. The resources curse is entirely confined to countries that operate below a certain threshold of governance and transparency. The possible boom or doom of countries while exploiting natural resources, could easily be predicted and attributed by taking an in-depth look at the level of the economic governance and transparency of that nation.

Going by Dr. Collier’s thesis of economic transparency, and mainly the more recently adopted extractive natural resources verified auctions, he recounts the case of the United Kingdom treasury department pricing their 4G telecom license to a maximum of 2 billion dollars, but after listening to their economists decided to let the market reveal the right and actual prices on those licenses through verified resource auctions and to the surprise of the entire world, the license rounds fetched whopping 20 billion dollars, and offset of 10 times!

Ever after, came the introduction of a worldwide standard of transparency governance which took the form of an institution known as Extractive Industries Transparency Initiative whose main purpose is to observe the progress and validity of information released on behalf of the citizens. This ensures that the general public is well updated and have sufficient information regarding the wealth that their extractive resources are generating. This institution can bridge the gap between uninformed citizens and governments.

The narrative has already been established that third-world countries especially those in Africa have always been susceptible to corruption and have hidden the truth from their faithful citizens that are yet to benefit from the fruitful endeavours that could come as a result of their natural resource extraction. The secrets to successful nations come about in these four steps ( in no particular order)  aid, trade, security and governance.

The economic process begins with is the exploitation of vast resources untapped beneath a  nation. And putting the required assets on top of the ground. The first step is to sell the rights to resource extraction. For the past 40 years, the process of dealing with the rights of resource extraction usually involves a  company/organisation representative flying in to deal with the ministers. This usually ends up being great benefits for the company and often great gains for the ministers but the country is so often left in the dust ignoring the potential benefits it could have on the citizens.

Somalia has now issued a very persuasive statement in the form of announcing the auction of the licensing rounds of it’s seven offshore blocks. This can effectively eliminate corruption whereby the highest bidder takes all. Reversing the divergent so that Somalia can catch up to the standards of developed nations will not occur without a catalyst for change. Huge opportunity for transformational development of a nation and its citizens are at stake. Need a critical mass of informed citizenry to critically and comprehensively judge their respective countries leaders and politicians.  A nation should be guided by the belief that these resources belong to its citizens and if any policy advocates that particular belief then it should be adopted.

DEPARTING WORDS OF WISDOM:

Although there is no one single formula or approach to be taken for a successful extractive resource exploitation that benefits nations, one thing universally agreed upon is the need the entire process to be transparent with good governance, from beginning to the end. However allow us to at bird’s eye view depart this high-level possible roadmap and program stages whence devising a successful and transparent resource extraction programs, as:

• Phase 1 – Developing the extractive resource (more on the Oil and Gas Sector).
• Appreciation of Alternative Models; Understanding of Resources and Potential Offerings
• Review current sector management capability, Institutional maturity, Available skilled personnel, Gap analysis, Outline different sector models, including for Oil and Mining Ministry, Petroleum Directorate, National Company (if needed and when it is needed)
• Outline different contract/ fiscal models for asset types and operating environments (i.e. onshore, offshore)
• Phase 2 – Preparatory Stage
• Develop legal, organizational and contractual framework, Design legal and organizational framework, Review available information on resources, extent and quality of data on mining, oil and gas blocks and licenses
• The initial determination of prospective-ness. Bid and contract seismic rounds, if necessary to develop sufficient data package, Design a seismic rounds
• Interview companies, Write term sheet, Conduct bids, Evaluate bids and award contracts, Shoot seismic, Process results
• Phase 3 – Advanced Preparatory Stage
• Based upon the seismic decide areas to license in the first licensing round
• Size and location of licenses
• Base commercial requirements (phasing and content of minimum work)
• Refine draft model contracts as necessary to reflect recent data
• Existing contracts if any, review existing contracts and work performed, develop strategy and plan for re-negotiation
• Phase 4 – Make Ready For Licensing Round and Re-negotiation of Existing Contracts
• Design licensing round and offering process, Prepare Initial Tender Protocol, Identify potential participants, Distribute Initial Tender Protocol, Review Expressions of Interest, Pre-qualify interested companies, Agree on re-negotiation terms for existing contracts, Conduct Licensing Round and Re-negotiations
• Hold public consultation on model contract and process
• Hold industry technical conference to review the prospectus
• Prepare and distribute Final Tender Protocol to qualified participants including
• Final bid criteria, Draft model contract, Data packages
• Timeline and detailed requirements for bidding, Roadshow to market the opportunities to international oil companies, Issue re-negotiation term sheet for existing contracts
• Phase 5 – Bidding Round and License Awards
• Conduct bidding round, Bid evaluation, Publication of bidding results
• Award and ratification of successful bids, Completion and signing of contracts
• Phase 6 – Prepare for Next Licensing Round
• Repeat processes for additional blocks following the resource strategy.

We might not expect a bumper harvest in this primary auctioning rounds, but as economists with daring optimism, we foresee the silver lining of hope in the horizon for Somalia if the verified resource auctioning model is following, and for sure this first and early bid rounds loudly says that Somalia is ready to conduct business through verified auctioning, and our resources are ready for the investor with the highest bid, which is a new game changer and can cause positive ripple effects for future generations to come.

The authors, young graduate brothers, Mohamed (23 Yrs old) and Mohamoud (22 Yrs old) are currently attached to the Ministry of Energy and Minerals of Somaliland, and could be reached at: