China Invests in Somalia Despite Instability

Published on PINR, by Adam Wolfe, 23 July 2007.

The Financial Times reported on July 13 that the Chinese National Offshore Oil Corporation (C.N.O.O.C.) has signed a deal with Somali President Abdullahi Yusuf to explore the northern Puntland region for oil. The initial agreement was signed last May, and it was endorsed at the China-Africa summit held in Beijing last November. [See: "Upcoming Summit Highlights Africa's Importance to China"]

A meeting between C.N.O.O.C. and Somali officials was held on June 24 to finalize the deal. The terms indicate that the Somali government would retain 51 percent of the oil revenues under a production-sharing arrangement. Further reporting from the Financial Times, however, revealed that Somali Prime Minister Ali Mohamed Gedi was not aware of the contract, suggesting that the oil deal remains vulnerable to political infighting …

… Conclusion:

China’s move into Somalia’s oil industry is a further example of its strategy for securing access to natural resources around the world. Rather than purchasing oil on the global markets, as the United States does for the most part, China prefers to secure control of the resources it needs at the source. However, because China’s oil firms lack the technical capabilities and political clout of the Western majors, Beijing prefers to deal with regions that are out of reach to the competition.

This practice has sparked a growing backlash across Africa to China’s policies. Many locals see Beijing’s actions as protecting corrupt and often dictatorial leaders. Beijing has attempted to counter this perception recently by investing in infrastructure projects in regions where the backlash is strongest, leaking reports of its unhappiness with the most controversial leaders, and granting local businesses better access to China’s markets in some industries.

The investment in Somalia’s Puntland province still looks risky, even by Chinese standards. The deal appears to have been struck with the local officials in the province that claims autonomy from the transitional, central government. However, the president of the T.F.G., who is from the region, was involved in the deal. The prime minister of the T.F.G. appears to prefer another model to attract investments, passing a national oil law that will clarify the legal questions that prevent Western firms from returning to Somalia. The Chinese deal may well fall victim to the political infighting that is likely to follow.

Still, the T.F.G.’s claim to control Puntland appears to be weakening as the central government remains frozen in a state of political collapse. Two days after the Financial Times first reported about the Chinese oil deal, the much awaited national reconciliation conference had to be delayed because security for the meeting could not be guaranteed in Mogadishu. Given the T.F.G.’s uncertainty, Beijing’s decision to work with the local representatives in Puntland may well prove to be enough, and China could soon be pumping Somali oil, if it even exists. (full text).

Link: Somalia’s Compromised National Reconciliation Conference, 19 July 2007.

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