Somalia wins bonuses on China oil fields

By Barney Jopson in Nairobi

Published: July 18 2007 22:56 | Last updated: July 18 2007 22:56

The Somali government will receive big production bonuses from CNOOC if it makes significant discoveries of oil in the country, even though the Chinese state-owned company has secured the right to nearly half of any profits from oil production.

A production-sharing contract signed in May 2006 says the transitional federal government (TFG) will receive $50m (€36m, £25m) bonuses for any wells that yield more than 200,000 barrels a day for 75 consecutive days, the Financial Times has learnt from one person who has seen the document.

The deal gives CNOOC and its smaller partner, China International Oil and Gas, the right to 49 per cent of the profits from any oil they find and promises the rest to the interim government.

Somalia remains a speculative region for oil exploration. Several western oil companies held exploration concessions in the country in the 1980s, but it has no proven oil reserves and only 200bn cubic feet of proven natural gas reserves, according to the US Energy Information Administration. Others, however, say the country’s geology is promising.

CNOOC is braving insecurity and political uncertainty as an insurgency against the interim government continues in Mogadishu, the capital. Somalia’s prime minister this week raised questions about the validity of the deal. But thanks to China’s thirst for oil, the group has developed a reputation for launching high-risk ventures.

The deal gives CNOOC and CIOG the right to search for oil in part of semi-autonomous Puntland province and exploration work is due to begin this year.

If oil is discovered, the final breakdown of profits will depend on other factors such as income tax and the payment of exploration costs. It is not clear whether the two Chinese groups paid an upfront sum to seal the deal when it was signed.

According to the person who has seen the contract, its signatories were Chen Zhuobiao, managing director of CNOOC Africa; Judah Jay, managing director of CIOG; and two junior Somali ministers who had been granted power of attorney by President Abdullahi Yusuf Ahmed.

The contract was endorsed when Mr Yusuf, who is from Puntland, met Fu Chengyu, CNOOC chairman, at the Chinese group’s headquarters in November, weeks before an invasion of Somalia by Ethiopia forced the Islamic militia that had been running Mogadishu to flee the capital. At the time of the meeting, the TFG had little authority outside its home base in Baidoa.

Revelations about the deal in the FT have illuminated splits within the fragile interim government.

Ali Mohamed Gedi, the prime minister, said this week he was not aware of the deal and no valid oil deals could be struck until the country’s parliament had endorsed a new oil law due in the next two months.

But a document signed last month in Nairobi by the Somali energy minister and the two Chinese groups says: “The TFG has and will continue to authorise CNOOC and CIOG to exercise their contract without any interruption during and after the effectiveness of the new national oil law.”

Copyright The Financial Times Limited 2007