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The potential direct and indirect benefits of an oil to cash program in Somaliland are of a disproportionately greater magnitude than the limited attention the idea has so far received both in Somaliland’s democratic political debate and in the academic literature on oil in Somalia. This article outlined one version of what an oil to cash program in Somaliland might look like. There are countless different permutations possible. It is high time for the debate on oil to cash in Somaliland to commence.


Oil To Cash In Somaliland: A Debate Whose Time Has Come

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Scott Pegg

Department of Political Science, Indiana University Purdue University Indianapolis (IUPUI), 425 University Boulevard, Indianapolis, IN 46202USA

Email: smpegg@iupui.edu

ABSTRACT

Somaliland might start producing oil in 2019. Yet, it has done little to prepare for the arrival of oil revenues which could exceed its current annual budget. Although Somaliland has been largely peaceful for two decades and recently inaugurated its fifth president after holding a democratic election, it remains entirely unrecognized. Oil revenues could positively transform Somaliland’s fragile political economy, but they also place it at significant risk for a political resource curse that could threaten its democracy, peace, and political institutions. Oil to cash or the direct distribution of oil revenues to citizens has been posited as a solution to the political resource curse. Somaliland has many of the elements necessary to make oil to cash work in place. Several factors combine to make Somaliland both potentially receptive to oil to cash and uniquely positioned to benefit from it. Interviews with political elites demonstrate receptiveness to the idea. Sample revenue calculations from other African oil producers highlight just how such a system could work to benefit Somaliland.

INTRODUCTION

The prospect that significant oil reserves exist in Somalia has generated scholarly excitement (Walls & Kibble 2012; Reitano & Shaw 2013; Balthasar 2014). Many analysts believe Somalia has the same geological formations that have already underpinned commercially viable oil production in Yemen (Reitano & Shaw 2013: 667; Balthasar 2014: 3). Live oil seeps were seen outside Berbera in the 1950s and Conoco, Chevron and Phillips all received concessions from the Somali government in the 1980s. Widely cited estimates put Somalia’s potential oil reserves at 110 billion barrels (Walls & Kibble 2012: 525; Balthasar 2014: 2) which, if correct, would dwarf those of sub-Saharan Africa’s leading oil producer Nigeria (37.1 billion barrels of total proved reserves) and place Somalia in the company of Kuwait (101.5 billion barrels) and Russia (102.4 billion barrels) among the top 5–10 reserve holders in the world (BP 2017: 12).

Yet, there is a distinct need for caution before concluding that Somalia will be the next Kuwait. Despite decades of hype, as Reitano & Shaw (2013: 666) emphasize, ‘Somalia has no proven oil reserves … and no active hydrocarbon production’. There is a fundamental distinction between oil occurrences and commercially viable reserves (Dualeh 2012, Int.). There is no doubt that there is oil in Somaliland, but the relevant question yet to be answered is whether there are commercially viable reserves (Dualeh 2012, Int.). São Tomé and Príncipe provide a cautionary tale. Four of the six oil concession areas in the offshore Joint Development Zone between STP and Nigeria were abandoned following disappointing results while two were never developed (Frynas et al. 2017: 247).

While the grand visions of 110 billion barrels of reserves may never materialize, oil could still generate billions of dollars of revenues in one of the poorest parts of the world. That revenue could be used to invest in human capital, build needed infrastructure and lift millions of Somalis out of abject poverty. Yet, sub-Saharan African countries like Angola (Le Billon 2001), Chad (Pegg 2006), and Nigeria (Iwilade 2014) have become synonymous with the ‘resource curse’ where oil-rich states are characterized by corruption, a failure to consolidate democracy, slow economic growth and an increased propensity for conflict. Oil could bring great benefits or great misery to Somalia.

This article limits its focus to just Somaliland and oil potentially found within the former colonial borders that it has claimed as its territory since it reasserted its sovereign independence in 1991 after a war that left much of it in ruins (Bradbury 2008). Somaliland’s sovereignty remains entirely unrecognized and it has now spent more than 25 years as a de facto state – an entity that controls territory, provides governance, receives popular support, persists over time, and yet remains unrecognized (Pegg 1998).

This article advances two main arguments. First, it argues that Somaliland is at significant risk of succumbing to a political resource curse. Specifically, a large influx of oil revenues threatens to increase corruption, degrade institutions, undermine democracy and increase the chances of conflict both within Somaliland and between Somaliland and Somalia. Second, ‘oil to cash’ or the direct distribution of oil revenues to citizens is a viable solution. Moss et al. (2015: 5) correctly note that ‘Any program that links income from natural resources with direct cash transfers to citizens must be carefully tailored to the multiple and complex specifics of each country’. The ‘multiple and complex specifics’ of Somaliland make it both well-suited for and potentially receptive to implementing oil to cash.

The article proceeds on two main assumptions. First, the resource curse is not inevitable. Several countries – Botswana, Chile, and Norway are frequently mentioned – have managed their natural resource wealth well. There is empirical evidence both supporting and opposing various aspects of the resource curse. We do not assume that the resource curse is inevitable, only that it is a risk.

Second, following Caspersen (2012: 23), we assume that ‘the absence of recognition does not render statehood impossible, but results in a different form of statehood’. Somaliland is a de facto state and ‘statehood without recognition takes a specific form and these entities are not just like other states without the bonus of recognition’ (Caspersen 2012: 25). Cases like Abkhazia, Northern Cyprus, and Somaliland demonstrate that de facto statehood does not render either state-building or democratization impossible, but it does constrain the specific forms that these may take. As discussed below, Somaliland shares multiple characteristics with other de facto states including a presidentially dominated political system, disproportionate spending on the security services, limited finances, and the larger goal of recognition both facilitating (through openness to international normative pressure) and hindering (independence stifling debate on alternative solutions) democratization. The dynamics of oil production in a de facto state may be different than they are in other widely recognized sovereign states. Indeed, oil production typically depends on widespread sovereign recognition. As Soares de Oliveira (2007: 52–3) emphasizes, ‘On account of the capital-intensive nature of their investment and the need to secure it, oil companies are absolutely dependent on the existence of a sovereign entity with which they can sign contracts and strike partnerships enabling the long-term business of oil to achieve its ends’. Somaliland officials complain that the lack of recognition hurts Somaliland’s ability to sign long-term contracts and elevates shareholders’ concerns about the stability of their investments (Dualeh 2012, Int.). Yet, oil exploration and production can coexist with disputed sovereignty. Although not an exact parallel, the Kurdistan Regional Government of Iraq (KRG) exported ∼550,000 barrels per day (b/d) of oil in 2016 (Genel Energy 2017: 7).

The remainder of the article proceeds in six main sections. First, there is a brief review of the resource curse literature. This is followed by a brief review of the oil to cash literature. We then assess Somaliland’s vulnerability to the resource curse by examining the quality of its democracy, its hybrid traditional and modern state institutions, and its capacity for revenue management. The final substantive section outlines why oil to cash is well suited to Somaliland and suggests specific ways in which it might be implemented.

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