If you were in a position to sell one third of Somalia’s underground natural resources, everything under the ground except water, how much would you sell it for? Would you seek the advice and consultation of your fellow citizens and listen to their concerns about the idea? Would you seek expert advice to guide you through the process and warn you of potential consequences of your decisions? Would you seek legal advice? These are some of the questions on the minds of many people regarding Puntland Oil and Mining agreement. In the second part of this article, we will present our opinions of the agreement and try to shed light on answers to some of the questions. We will try our best to provide corroborating documentation supporting our assessment. This approach is particularly appropriate when discussing financial aspects of the agreement.
Based on what we have learned so far about the subject matter, we strongly believe that the approach and leadership with which Puntland administration has handled this agreement was debilitated by ineptitude, greed, lack of vision, and was beset with arrogance and inflated egos. We identified three major flaws of the deal.

Strategic Flaws of the Agreement

The readers of Part I of this article know that few individuals at the top of the leadership in Puntland and TFG administrations signed an agreement which gave away over 90% of the ownership of oil and minerals in Puntland regions to a foreign company, Consort Private Ltd. This firm seems to exist only in name and has no business track in the world. The agreement is so unfavorable to Somalia that oil and gas industry experts were bewildered when its news was announced late last year. Steve Rothertham of EnergyView, an Australian oil and gas industry news magazine, wrote about it in an article titled “A Punt too far?” He interviewed Dr. Ali Abullaahi Barkadle, a Somali resource and management consultant living in Melbourne, who criticized the deal on several grounds. He said,

“The Puntland contract gave an unfair advantage to Consort Pvt Ltd and Range Resources by lumping together mining and oil concessions and giving the whole state – roughly 212,000 square kilometers – to a single company was unheard of.”

“It seems the negotiators had a very limited understanding of the mining and oil industry or were in need of quick money.”

“Puntland can be divided into many blocks using modern GIS systems. The area of 212,000sq.km is too huge for a viable study to be done on. Even multinational corporations with huge budgets for explorations cannot bite into such a huge cake without damaging shareholder value.”

“Somalia had issued a number of concessions and prospecting licenses to a number of international oil companies in the 80s when Hunt Oil discovered oil in Yemen that protruded into Somalia. Ownership questions still remain since most of these companies declared force majeure.”

A copy of the article is available at http://www.energyreview.net/storyview.asp?storyid=48122&sectionsource=s0

Environmental Flaws of the Agreement

One of the most awful aspects of the agreement is that it contained no provisions to address potential environmental problems associated with mining activities which could have severe negative impacts on the quality of land, air and water resources. These problems are widely recognized in the world and include:

• Watershed deterioration caused by increased erosion and runoff rates as result of large scale mining excavations. Rangelands, the backbone of livelihood in the region, are extremely vulnerable to this kind of damage.
• Mining related activities such as digging of underground tunnels and trenches can increase the risk of groundwater contamination. Human health concerns include hazardous substances disposed at surface which could find their way into the ground through these structures, thus, providing an easy migration pathway for contaminants to reach the groundwater.
• Unsafe waste disposal practices could be rampant throughout mining sites in the region due to lack of regulatory oversight. This could lead to wide spread dumping of chemicals and other toxic substances used in mining operations into the ground.
• Risk of massive land deformation due to collapsing of mining tunnels. This is particularly true if the design and operation of these structures are not planned and monitored carefully by qualified institutions.
• Lastly and most importantly, all of the above risks are likely to happen because Somalia has neither the environmental protection laws nor the qualified workforce and institutional support to oversee complex oil and mining operations in order to protect human health and the environment.
  

Failure to address these issues in a well thought-out manner carries the risk of ecological disasters which linger in the region for along time. The communities who live in areas targeted for contract works should be aware of the health and safety risks as well as economic deprivations to their land and way of life. If governments at all levels failed them, they do have a right to look out for themselves and they deserve the support of their fellow citizens.

We believe Range Resources has mixed feelings about the gross negligence by their Somali counterparts to protect human health and the environment. On one hand, they see it as a risk to the project since future Somali authorities could impose strict laws which could increase the cost of operations. On the other hand, they seem to use it as selling point to investors by mentioning that there are no regulatory requirements from local and Federal governments. In other words, this is a high profit project. A statement to this effect is mentioned in the prospectus document Range Resources put together to raise $3.45 million from investors in Australia and New Zealand. You can find the document at the link below. See Section 7.0 which discusses government regulatory compliance.

http://www.rangeresources.com.au/asx/Rights%20Issue%20Prospectus%20Draft%206%20(2-12-05)%20CLEAN.pdf

The above observations led us to believe that country is not ready to enter agreements such as the one signed by Puntland at this time, and the Somali public has the right to rise against the actions of few individuals driven by irrational greed and irresponsible behavior that endangers the lives of many citizens.

Financial Flaws of the Agreement

The flaws in of the agreement defy logic and common sense to the point one has to ask what were Somali representatives in the negotiation table doing. Who were they looking out for? Based on what we know now, they were there just to pick up the check. That is the only rational conclusion a reasonable person can deduce from their actions. There are a lot of speculations about how much money changed hands in this deal. We don’t know exactly how much money Puntland and TFG governments received for signing the deal, since the agreement between Puntland and Consort Private Ltd is a highly kept secret known to few. However, based on two documents released by Range Resources, we were able to make a reasonable estimate of the amount of money Range Resources will pay to Consort Private Ltd and Puntland/TFG administrations to get a majority ownership of oil and mineral rights in the region.

The payments made by Range Resources are in three categories. It is important to understand the differences and the value of each one of them to get a realistic sense of the actual money going to the payees.

Cash payments: Direct cash payments to the payee.

Company shares: These are shares paid upon Completion Date (after signing all necessary papers.) To calculate the value of these shares we obtained price of Range shares as reported by the Australian Stock Exchange and then converted it to US dollar using the exchange rate at the time of this article ( 4 cents per share, 1 Australian dollar=0.768332 US dollar). We don’t know when these shares can be exercised (sold). However Range did not put a time restriction on them, so we assumed they can be cashed at any time.

Company Share Options: These shares are subject to conditions which payee has to fulfill to the satisfaction of Range Resources. These conditions include but not limited to ensure contract work schedule is not interrupted/delayed and availability of third party investors to raise additional funds for the project.

The leaders of Puntland and TFG, based on our estimation, sold 1/3 of Somalia’s underground resources for the following benefits:

• A cash amount of about US $ 5.9 million.
• About US $ 2.6 million in the form of Range Resources shares.
• About US 2.6 million in the form of Range Resources share options.
• A royalty payment of 5 to 10 percent of the revenue generated in production phase, if the deal gets that far. This means that the maximum benefit the Somali people can hope to get out of this agreement is 10% of the revenue.

It is possible that Consort Private Ltd will receive some of the above money, although an insignificant share. There is also a chance that Somali officials may never cash the share options in the amount of US $ 2.6 since it comes with a number of conditions which may not be fulfilled. Having said this, as of May 31, 2006 the total cash amount that would be paid to Puntland/TFG officials is about US $ 2.6 million excluding any payment from company shares and share options. We don’t know who the beneficiaries of the shares offered by Range Resources are. For its part, Consort Private Ltd will get most of its payment when 3rd party investors come on board. Not a bad deal for a one man company. See the tables below for details.

Payments to Puntland/TFG Administrations

Source: Agreement between Range Resources and Private Consort. Please see Part I of the article.

Payments Promised to Consort Private after 3rd Party Investors come on Board

Source: Agreement between Range Resources and Private Consort. Please see Part I of the article.

The source for royal payments is a document presented at Range’s annual company meeting in November 28, 2005. It contains interesting scientific details, unknown to many Somalis, regarding the prospect of oil in north eastern regions of Somalia. Range Resources acquired substantial data from former oil companies suggesting the existence oil reserves estimated at more than 500 million barrels. For details see the document at the link: http://www.www.rangeresources.com.au/docs/slide.ppt

Note: you need to download it first and then view it with Microsoft PowerPoint. Look at slide #16 for royalty payments.

Conclusion
We wonder if any other country has been robbed of its wealth as belligerently as the Puntland Oil and Mining Agreement did to the people of Somalia. An interesting analogy to this deal, in our opinion, is when the Dutch bought the island of Manhattan in New York in early 18th century from the native Indians for a bunch of beads amounting to 60 Dutch Guilders, which was later converted to about 24 US dollars.

Omar M. Abdi ---------------Salah Fatah
Fairfax VA -------------------Laurel, MD
oabusa@yahoo.com-------- sfatah2@yahoo.com