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Pioneer negotiating risky, potentially lucrative deal offshore West Africa Company has MOU with Nigeria’s Chrome Energy subsidiary for joint evaluation of block in Joint Development Zone between Nigeria and The Democratic Republic of Sao Tome and Principe Ray Tyson Petroleum News Houston Correspondent
U.S.-based exploration and production independent Pioneer Natural Resources, with a goal of expanding its growing position in West Africa, is tiptoeing into an unexplored area of the Gulf of Guinea where the politics are shaky but the oil payoff could be huge.
Pioneer also could team up with a little known company noted for its financially troubled past involving a shareholder uprising back home in the United States and several company takeovers. Environmental Remediation Holding Corp. also had to contend with a military coup in The Democratic Republic of Sao Tome and Principe, a tiny, politically unstable and poor island nation also located in the hydrocarbon-rich Gulf of Guinea.
ERHC, whose beginnings go back to Louisiana but which is now controlled by Nigeria’s Chrome Energy, has entered into a memorandum of understanding with Pioneer calling for “the joint evaluation and participation” in Block 2 of the so-called Joint Development Zone, shared 60 percent by Nigeria and 40 percent by Sao Tome, following hard-fought negotiations over territorial rights. Companies negotiating ERHC did not return calls and Pioneer offered little additional information concerning the MOU, other than to say there was no deal with ERHC and that the companies were merely negotiating terms regarding a high-potential exploration block that has yet to be awarded by the Joint Development Zone authority.
Nevertheless, “we feel the potential could be great on that block,” said Chris Paulsen of Pioneer’s investor relations department.
Block 2 was among nine blocks offered in last year’s first Joint Development Zone licensing round. Seismic company WesternGeco is said to have identified 17 prospects on the nine blocks with combined estimated reserves of 14.4 billion barrels of oil, a tidy volume indeed should the estimate prove to be accurate.
Because of its early involvement with Sao Tome and Chrome’s business and political connections in Nigeria, struggling ERHC was able to negotiate highly attractive preferential rights for six of the Joint Development Zone blocks.
In fact, ERHC once held the exclusive rights to manage all of Sao Tome’s oil and gas affairs, despite the company’s troubled background and lack of money. That deal included the right to explore and develop concessions of its choosing, plus an astounding 5 percent overriding royalty on all production generated by other companies that might have operated in Sao Tome’s virgin waters.
A year ago, Major Fernando Pereira led a bloodless military coup in Sao Tome, accusing the government of corruption and the mismanagement of public funds. A truce struck between the junta and President Fradique de Menezes included provisions for the creation of a new government and greater transparency in Sao Tome’s dealings with the oil industry. Even altered terms appear to be a sweet deal ERHC’s claims under the earlier agreement were altered following a dispute with Sao Tome, a former Portuguese colony with a population of around 140,000 and a small land mass about the size of Rhode Island, 372 square miles. Still, it appears to be a sweet deal for ERHC.
Under the revised agreement, ERHC gained the right to increase its participation in the Joint Development Zone. It formerly had a total 30 percent paid working interest in two blocks. Under the revised agreement, it has varying interests in six exploration blocks that total 125 percent. In exchange, the company relinquished its right to the overriding royalty, as well as a share of licensing bonuses and profits from other producers in the Joint Development Zone.
However, in the Sao Tome controlled Exclusive Economic Zone, ERHC would have the right to acquire a 100 percent working interest in two blocks of its choosing without having to pay any bonus, subject to Sao Tome’s reserving three blocks of its choice. Additionally, ERHC would have the right to acquire a 15 percent working interest in any two blocks in the Exclusive Economic Zone but would have to pay a share of the bonus. Sao Tome has yet to hold a licensing round of its own. As in the Joint Development Zone, ERHC also would not be precluded from bidding for additional working interest in any block in the Exclusive Economic Zone either alone or in partnership with other oil companies. ERHC supported financially by Chrome Regarding Block 2 in the Joint Development Zone, ERHC chose to receive a 30 percent working interest requiring no signature bonus. A bonus of $113 million was submitted by Foby Engineering. However, that bid has yet to be accepted or the block awarded. The only bid accepted thus far was for $123 million (Block 1) from a consortium led by ChevronTexaco.
ERHC has said it relinquished its former rights so the licensing round could proceed, adding that its ability to participate in four blocks without having to pay signature bonuses “improves any valuation of project economics to competition, capital resources, general economic conditions and other risks … “
Pioneer could hook up with a company with virtually no money, shedding what few hard assets it once had to focus entirely on the Gulf of Guinea. In fact, ERHC has been operating in the red for some time, supported financially by Chrome.
Chrome Energy is part of the Chrome Group, a private holding company which has operating companies in Nigeria and the United States. It is involved in commercial banking, insurance, air transportation, power, telecommunications, oil and gas, and downstream petrochemical and refining, primarily in Nigeria.
ERHC reported a loss of $616,378 for the first quarter of 2004 and a loss of $698,588 compared to the same period a year earlier. The company generated zero revenues and further reported that its liabilities exceeded its assets by $14.69 million. The company incurred a loss of $3.15 million in fiscal year 2003 and a loss of $4.08 million in fiscal year 2002.
“It is expected that the company will continue to borrow funds from Chrome in the future but there is no assurance that funds will be made available or under similar terms,” according to ERHC’s most recent quarterly report. The company said it was involved in negotiations with unspecified parties to raise cash for general operations and specific projects, presumably for its Gulf of Guinea prospects, “until such time as the company generates revenues sufficient to maintain itself as a viable entity.” ERHC began in East Texas, Gulf of Mexico Formed in 1996, ERHC began with about $5 million in capitalization, aging production wells in East Texas, and a contract to remediate some 400 wells in the Gulf of Mexico. Former chief executive Sam Bass is said to have used his extensive international ties to help land the contract in Sao Tome, which at the time was emerging from years of political strife and financial problems. As part of the joint venture agreement, ERHC was to funnel $1 per barrel of future production into a special fund to help educate the children of Sao Tome.
ERHC faced extinction in early 2000 when a group of disgruntled shareholders went to court in Colorado in an attempt to gain control of the foundering company from Arkansas investor Geoffrey Tirman, who laid claim to 80 percent of the company. Shareholders accused Tirman of reneging on an agreement to provide needed financing for ERHC and jeopardizing the company’s prized contract with Sao Tome.
Tirman, who had little or no experience in the oil and gas industry, traveled to Sao Tome in an apparent effort to salvage the potentially lucrative oil contract, but ended up in a contentious encounter with government officials. A warrant for Tirman’s arrest reportedly was issued after he departed the country.
Chrome, with its strong ties to Nigeria, took control of ERHC in early 2001 by acquiring a majority of ERHC shares. Pioneer’s Paulsen said Sao Tome would be higher on the ladder of political risk than most countries Pioneer deals with but that the company is willing to take on a partner in the Joint Development Zone.
“We are trying to get a foothold in Africa and particularly in West Africa,” he said, noting the company’s early 2004 agreement with Kosmos Energy to jointly explore in a huge area along the west coast of Africa extending from Morocco in the north through Angola in the south, excluding Gabon where Pioneer already is active. Pioneer also is active in North and South Africa.
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