Somalia–Türkiye Oil Agreement: Major Legal and Financial Concerns

By T. Roble

In March 2024, Somalia’s Federal Government signed an oil exploration and production agreement with Türkiye Petrolleri Anonim Ortaklığı (TPAO), granting Turkey exclusive rights to drill for oil in Somalia’s offshore and onshore blocks. While the deal was hailed as a step forward in bilateral cooperation, a closer examination reveals significant departures from Somalia’s petroleum laws, international norms, and revenue-sharing frameworks that could seriously undermine Somalia’s financial and legal interests.

Somalia’s Oil Laws and the 2018 Revenue Sharing Pact

Somalia’s management of its oil resources is guided by laws and agreements aimed at ensuring fairness and transparency. The 2018 Baidoa Revenue Sharing Pact between the Federal Government and Federal Member States (FMS) set a clear formula: 55% of offshore oil revenues go to the Federal Government, while 45% are allocated to Member States and producing communities. This framework was designed to promote equitable development and national unity.

Additionally, the Petroleum Act and Production Sharing Agreement (PSA) require

Payment of signature bonuses and license fees upfront,
Royalties calculated based on the market value of oil,
A cap on cost recovery at 70%,
Obligations to supply domestic markets,
Development of local content to build national capacity.

In addition, the Extractive Industries Fiscal Regime Law (2023) states that royalties must be based on the market value of crude oil, determined by selling price or Brent crude index.

How the Turkey Deal Deviates

No Signature Bonus or Upfront Fees

The agreement exempts TPAO from paying any signature bonus, license fee, or production bonus. These upfront payments are essential for providing immediate financial benefits and signaling investor commitment. Their absence breaks with Somalia’s established revenue-sharing framework and denies Federal Member States and local communities the early revenues they depend on. Although TPAO will contribute to a Community Fund, this does not compensate for the transparency and scale of traditional upfront payments.

Royalties Set Too Low and Not Market-Linked

The deal offers Somalia a royalty capped at 5%, without linking it to actual market prices. This contradicts Somalia’s fiscal rules requiring royalties to be tied to market value and ignores progressive royalty structures based on production volume. In particular, a fixed, low royalty exposes Somalia to potential revenue losses, especially if oil prices rise.

Excessive Cost Recovery

TPAO is allowed to recover up to 90% of petroleum production costs before profits are shared. This is significantly higher than international norms and Somalia’s own 70% cap. Such a high cost recovery rate means Somalia will receive only a small fraction of production profits for years, delaying important financial returns.

Domestic Supply Obligations Ignored

While Somalia’s laws require oil companies to prioritize supplying the domestic market if requested, the agreement allows TPAO to export all its share of oil and gas without any obligation to supply Somalia. This could leave the country dependent on imports for refined products, despite producing crude oil domestically.

Weak Local Content Requirements

The deal does not obligate TPAO to hire Somali workers, partner with local businesses, train Somali professionals, or maintain a local office. This limits opportunities for job creation, skills development, and broader economic benefits from the oil sector.

Exclusive Rights Without Competition

TPAO was granted exclusive rights to Somali oil blocks without a competitive bidding process. This undermines transparency and Somalia’s ability to negotiate better terms through market competition.

Security Costs Passed to Somalia

Turkey can recover security-related costs through the production sharing system, meaning Somalia may indirectly fund Turkey’s security expenses from its own reduced oil revenues.

Impact on Revenue Sharing and National Interests

The lack of signature bonuses and low royalties undermine the 2018 Revenue Sharing Pact, reducing funds available to Federal Member States and producing communities. This threatens local development projects and risks eroding trust between federal and regional governments. The Community Fund contribution, while positive, does not fill the financial gap left by missing payments.

Model PSA vs. Turkey–Somalia Oil Agreement

Category	Somalia Model PSA	Turkey–Somalia Agreement	Comment
Signature Bonus & Fees	Mandatory (Article 33)	Waived	Violates PSA and 2018 FGS–FMS Pact
Royalty Rate	5% (Schedule 8)	“Up to 5%”, no clear formula	Below legal minimum, not market-based
Cost Recovery Cap	70%	90%	Delays state revenue; well above global norms
Domestic Supply Obligation	Required if notified (Article 10)	Not mentioned	Ignores PSA, weakens energy sovereignty
Local Content	Mandatory hiring, training, procurement (Clause 29)	No obligations	Missed opportunity for jobs & skills
Competitive Bidding	Required	None – direct award	Undermines transparency and fair pricing
Security Costs	May be covered if approved	Recoverable by contractor	Somalia bears cost of foreign protection
Community Fund	Required	Included	Positive, but not a substitute for missing bonuses
Dispute Resolution	Neutral venue (ICSID/UNCITRAL)	Istanbul, Turkey	Weakens Somalia’s negotiating position

Somalia’s oil sector has the potential to drive national development, but only if agreements respect the country’s laws and international best practices. The current Turkey–Somalia oil deal waives critical financial obligations, bypasses Somali petroleum law, weakens revenue sharing, and diminishes Somalia’s control over its resources. For Somalia’s oil wealth to truly benefit its people, future agreements must include upfront payments, market-based royalties, strong domestic supply protections, reasonable cost recovery limits, and full transparency. Without these safeguards, Somalia risks losing a vital opportunity for sustainable growth.