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Somalia’s Khatumo state warns unlicenced international oil companies

“Khatumo State of Somalia is Warning an International Oil Companies against oil exploration in Sool, Sanaag and Cayn regions Without Leasing/Licensing from KPAMO” (Nugal Block: The major petroleum resources in horn of Africa Regions).

Khatumo State of Somalia announced in February 2012 the beginning of oil exploration activities in three locations in Nugal Block in the southeast parts of Khatumo State region, the scene of a year’s conflict, and will give more details of the companies involved.

Since 1990 there were no Somali’s institutions of government, economic interest in minerals and technical ability to extract them, there hasn’t also been mineral legislation and methods of giving permission to miners by the government (“crown”, “nation”) or its agencies, by the owner of the land or the owner of subsurface mineral rights – to extract them.

Issues which Khatumo State will consider important in today’s world – access to land, payment to the owner/sovereign for extraction and depletion of minerals, supervision of operations and safety –  for both miners and third parties -, economic contribution of mining to local communities – have been around for a very long time.

These issues are still relevant and their regulation – in legislation, subsidiary regulations, in mineral agreements and licensing conditions as well as in administrative practice – evolves in response to advances in technology, emerging economic concepts, financing methods and political attitudes.

Khatumo State of Somalia will review current licensing methods and will negotiate petroleum development agreements, one can therefore both come to the conclusion that there is veritably new and that future agreements may contain significant innovations.

The KPAMO will act as a holding State organization, acquiring and managing upstream petroleum interests on behalf of the Khatumo State people.

The KPAMO will be set up as a subsidiary of the Somali Federal PetroleumDepartment (SFDP), to take over some of the SFPD’s existing operations including:-
a) Unincorporated joint ventures and related loans
b) Financing arrangements; joint operating arrangements
c) Litigation and staff.
Additionally, the Khatumo State Government may at any time vest upstream assets in the KPAMO.

The KPAMO will be established as a public company within three months of the SSC being passed through the Khatumo State National Assembly into law. From the date of its incorporation, the KPAMO will have transferred to it, all assets and liabilities held by the ANY OTHER AGENCY on behalf of the Government, including the KPAMO’s interests in existing unincorporated joint ventures. Within three years of incorporation, a divestment of shares in the KPAMO must be made to the Khatumo State public.

I) Leases and Licensing under the KPAMO
The following leases/licenses will be available:1) Petroleum Exploration License (PEL) in SSC regions:
A PEL grants the right, for three years, to non-exclusive geological and geophysical exploration.
2) Petroleum Prospecting License (PPL): the holder of a petroleum prospecting license shall have the right

(i) To conduct exclusive petroleum exploration operations and
(ii) To carry away and dispose of crude oil or natural gas won during prospecting operation. A KPAMO shall last for up to five years or up to eight years

Petroleum Mining Lease (PML): A PML shall grant the right exclusively to search for, win, work, carry away and dispose of petroleum within parcels of each commercial discovery of crude oil or natural gas, or both, to the PPL Licensee. PMLs shall be granted for a maximum term of 10 years

II) KPAMOFeesIn relation to fees for licenses and leases the KPAMO will provide clarity in terms of figures. The KPAMO states that “such fees as may be contained in this Act and in any regulations made by the Minister pursuant to this Act and on the recommendation of the Inspectorate” shall be payable. Provision is also made in the KPAMO for financial contribution by licensees/leases for remediation of environmental damage. Every licencee/lessee shall pay a prescribed financial contribution to an environmental remediation fund established by the Khatumo State, for the rehabilitation or management of negative environmental impacts with respect to the licence or lease. In determining the amount of the financial contribution, the Khatumo Inspectorate shall take into consideration the size of the operations and a reasonable level of environmental risk that may be determined to exist.
III) Award Process and Assignment
Licences and leases will be awarded by the Khatumo Ministerial Office as a result of open, transparent and competitive bidding processes conducted by the KPAMO. Eyebrows may be raised however given that provision is also made for the SFDP to grant licences and leases on a discretionary basis (although the conditions for such award are not provided). There is likely to be much debate on this issue in Khatumo State Parliament, as well as industry comment, and it will remain to be seen whether this particular provision will survive passage through the consultation and parliamentary process. Assignment of upstream interests awarded will be possible, however the written consent of the Khatumo Ministerial Office will be required.
The KPAMO will oversee the award of leases/licences, making recommendations to the appropriate Ministerial Office before they are granted. The KPAMO states that any company incorporated in Khatumo regions, and not specifically disqualified by the Khatumo parliament, is a qualifying company for the purposes of bidding for leases/licences.The roles of the Khatumo State entities listed and described above in the new upstream leases/licences structure. This is a clear signal that old leased petroleum organizations in this area will need to see clarified new licences before it can have real claim in the old framework. 
VI) Downstream Petroleum: The KPAMO’s licensing regime for downstream operations, to be overseen by the any other petroleum contractors, gives the KPAMO the authority to grant downstream licences for activities including:a) Construction and operation of: process plants, including those for gas liquefaction; petroleum transportation pipelines for crude oil or gas or condensate or petroleum products;b) A petroleum transportation network; and a petroleum distribution network;
c) Undertaking the supply of downstream products or natural gas; owning and running a downstream products or natural gas processing or retail facility; andutilisation of all chemicals used for downstream petroleum operations including chemicals used in the processing, distribution and storage of petroleum products in Khatumo State.

The Khatumo State Ministerial Office will also be empowered to make regulations relating to the downstream sector in respect of matters which include prescribing additional activities to be undertaken on the basis of the licence or providing generally for matters relating to downstream licences granted or operations carried on under theKPAMO. In relation to tariffs and pricing the Khatumo State Government, through the KPAMO, is seeking to ensure that the pricing of downstream petroleum products is fair and not open to collusion or manipulation, and as such will regulate prices.

VII) Health, Safety and Environment from a general perspective the KPAMO, as one would expect, stipulates that operators must comply with applicable legislation and regulations relating to health, safety and the environment, irrespective of which governmental body has implemented them.
In addition, the KPAMO provides that operators holding a PEL, PPL or PML shall be liable to pay fair and adequate compensation in the event of “disturbance of surface or other any other rights to any person who owns or is in lawful occupation of the licensed or leased lands, in accordance with written guidelines to be issued by the Inspectorate”. We do not yet have clarity on the content of these guidelines.

IV) Fiscal provisions
The KPAMO introduces a new Leasing/Licensing regime for the exploration petroleum industry and, broadly speaking, is centered on two proposals. Firstly and most notably, the previous Petroleum Licences will be replaced by the new Khatumo Hydrocarbon Licence (KHL) to be applied to profits from upstream petroleum operations.

Secondly, the KPAMOwill extend the applicability of the existing Companies Income Tax (CITA) to profits emanating from upstream petroleum operations.

Khatumo’s Hydrocarbon and Mineral Taxation (KHMT) will be payable on all profits of any company engaged in upstream petroleum operations at the KPAMO guideline rates: Elements of the draft KPAMO are to be admired, such as the desire to introduce a more transparent and competitive licence award process.

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