Somalia-Turkey oil deal: The truth about cost recovery

[Deeq A.]

MOGADISHU, Somalia – Oil and gas exploration holds great promise for Somalia’s economic future. But turning underground resources into national wealth has never been as simple as drilling wells.

For a country still recovering from decades of conflict and rebuilding its institutions, the critical question has never been whether Somalia has oil — the real question is how to unlock these resources safely, responsibly, and without putting the nation’s finances at risk.

The recent agreement between Somalia and Turkey has sparked heated debate, much of it focused on the widely misquoted “90%” figure. However, to truly understand the agreement, one must step back and consider the global history of oil contracts, the financial reality of exploration, and why production-sharing agreements with cost recovery are the global standard for countries at Somalia’s stage of development.

The cost of oil exploration: Why going solo was never an option

Oil exploration—especially offshore—is one of the most expensive and risky undertakings in the world. Before oil can be produced, a company must spend heavily on seismic surveys, drilling rigs, offshore platforms, pipelines, and safety systems. Drilling a single offshore well can easily exceed $100 million, and there is no guarantee of success.

For Somalia, attempting to fund and operate this exploration alone would require borrowing vast sums of money or diverting critical funds from healthcare, education, and security. Even worse, if the exploration were to fail, Somalia could be left with nothing but debt.

With these realities, Somalia’s government opted for a more strategic approach: attracting international investment through a Production Sharing Agreement (PSA) with a cost recovery mechanism — a model successfully used by dozens of countries worldwide.

What is cost recovery — and why is it standard practice?

Production Sharing Agreements are designed for countries with natural resources but lack the capital and technical capacity to explore and develop them independently. Under a PSA:

• The contractor (the investor) pays for all the upfront exploration, drilling, and production costs.
• If oil is discovered, the contractor first recovers its investment from a portion of the oil produced — this is known as cost recovery.
• After the investment has been recovered, the remaining production — profit petroleum — is shared between the government and the contractor, according to a profit-sharing formula set in the agreement.
• Throughout the process, the ownership of the oil remains fully with the host country.

In the Somalia-Turkey agreement, the contractor may recover up to 90% of annual production as cost recovery — but this is limited to the period required to repay the approved investment costs.

Somalia still receives up to 5% royalty from the first barrel produced, regardless of cost recovery. After cost recovery is completed, the profits are shared between the two parties, though the exact profit-sharing percentages are determined in the PSA annexes.

This structure ensures that Somalia benefits from its resources without taking on the financial risks of exploration.

Global context: Somalia follows a path many have taken

Somalia is not the first country to start its energy sector through cost recovery agreements — and it will not be the last. Many nations that are now major oil producers began with similar or even less favorable terms. Over time, as their capacity, experience, and bargaining power grew, they renegotiated stronger deals.

A few well-known examples include:

• Saudi Arabia: In the early years, American companies (Aramco) controlled 100% of Saudi oil production, with the Saudis receiving only minimal royalties. It was not until 1950 that Saudi Arabia negotiated a 50/50 profit-sharing agreement. Full nationalization came much later, in 1980.
• Iraq: British and American oil companies dominated Iraq’s oil sector until the government nationalized the industry in 1972.
• Iran: The Anglo-Iranian Oil Company (now BP) controlled Iran’s oil for decades. Nationalization was first attempted in 1951, followed by years of renegotiation.
• Venezuela: After many years of foreign control, Venezuela achieved a 50/50 profit-sharing arrangement in 1948 and later fully nationalized its oil sector in 1976.
• Ghana, Uganda, and Mozambique: These more recent producers have used PSAs with cost recovery similar to Somalia’s agreement, gradually improving national participation and negotiating better terms as their industries mature.

These examples show that early-stage agreements with cost recovery are not a sign of weakness — they are the global norm for emerging producers.

The 90% myth: Separating headlines from reality

Much of the controversy surrounding Somalia’s deal has centered on the claim that “Turkey will take 90% of Somalia’s oil.” This statement is not only inaccurate — it misrepresents the very nature of cost recovery agreements.

The truth is:

• The 90% figure applies only to cost recovery — the portion of oil used to repay the investor’s upfront spending on exploration and production.
• This cost recovery share is temporary and disappears once the investment is repaid.
• Somalia earns royalties of up to 5% from the start, plus its share of profits after cost recovery ends.
• At no point has Somalia lost ownership of its oil.

This arrangement allows Somalia to begin earning from its resources immediately without the burden of debt or financial exposure.

Learning, building capacity, and negotiating better deals over time

No country begins its oil journey with perfect bargaining power. But countries that succeed — like Norway, Ghana, and Saudi Arabia — did so by:

• Learning how the industry operates
• Building local expertise and national institutions
• Using early contracts as stepping stones toward stronger future agreements

Somalia’s leadership has chosen a similar path: secure investment today, gain experience, and strengthen its position for the future.

The agreement with Turkey is not the end of Somalia’s energy strategy — it is the beginning of it.

Conclusion: A strategic first step toward energy independence

The Somalia-Turkey oil agreement represents a pragmatic, globally recognized approach to developing natural resources in the safest way possible for an emerging producer.

By sharing risk with an investor, Somalia:

• Maintains full ownership of its oil
• Avoids debt and financial uncertainty
• Earns revenue from royalties immediately
• Shares in profits once costs are recovered
• Builds the knowledge and leverage to negotiate better deals in the future

This is not a story about giving away resources. It is a story about managing them wisely—with strategy, not slogans.