Attorney General finds ‘serious flaws’ in the award of oil exploration contracts

The Attorney General’s Office of Sao Tome and Principe says it has found “serious flaws” in the way that contracts were awarded to oil companies to explore offshore waters shared with Nigeria. It said in a report published on December 9 that several of the companies chosen six months ago to explore the Joint Development Zone (JDZ) shared by Sao Tome and Nigeria lacked the technical know-how and the financial muscle necessary to carry out the work. “The procedures used to select the companies which received concessions contained serious flaws and did not satisfy the minimum standards required for the award of such licences,” the report said. Attorney General Adelino Pereira investigated the controversial second licensing round in the JDZ, whose results were announced on 31 May. He launched the probe following protests that many of the Nigerian-controlled companies which were awarded exploration rights were simply the investment vehicles of financial speculators with no track record of achievement in oil production or exploration. His investigation, which was backed by the World Bank and assisted by Dobie Langenkamp, a professor of energy law at the University of Tulsa in the United States, upheld these complaints. It concluded that: “The second licensing round suffered serious procedural flaws, including the award of equity to several companies which were either unqualified or which had inferior qualifications in technical and financial terms.” This blast of official criticism will put pressure on the government of Sao Tome and Principe to review the award of oil exploration contracts in the five offshore blocks concerned. Nigeria is less concerned But diplomats and oil industry experts noted that the authorities in Sao Tome cannot revise the results of the second licensing round or call for new bids without the agreement of Nigeria, which appears less concerned at the alleged irregularities. They also noted that both countries are under pressure to sign production sharing agreements with the companies already awarded acreage before Chevron completes its first exploration well in block one of the JDZ in March. This well, to be drilled in 1,700 metres of water, is seen as a crucial first indicator of whether the JDZ, situated 200 km south of the oil-rich Niger Delta really does contain large oil and gas reserves that would be profitable to exploit. A consortium comprising Chevron, Exxonmobil and the Nigerian company Dangote Energy Equity Resources, paid a signature bonus of US $123 million for the right to explore block one after being awarded the acreage in the first licensing round in the JDZ last year. But oil industry sources say that if Chevron’s first well turns out to be a dry hole, or if it provides inconclusive evidence of the existence of large oil reserves in block one, the appetite of other oil companies to explore neighbouring blocks in the JDZ, which are reckoned to have less potential, will be diminished. Officials said Nigeria and Sao Tome had been close to signing production sharing agreements with four of the five consortia chosen in the second licensing round before the Attorney General’s report was published. Rafael Branco, the Economic Director of Sao Tome’s National Petroleum Agency, confidently predicted that at least two of them would be signed before Christmas. But he said problems had arisen in negotiations on block four, the most promising piece of acreage on offer. The special rights of ERHC Noble Energy, the US independent oil company which had been selected to carry out the drilling and exploration work on behalf of the winning consortium in block four, withdrew from its partnership with co-operator ERHC at the end of October without explanation. ERHC, a Texas-based company controlled by Nigerian millionaire Sir Emeka Offor, is one of those companies without a track record of oil exploration or production which is widely regarded as unsuitable by critics of the second licensing round. ERHC negotiated extensive rights to explore for oil in Sao Tome’s offshore waters for a very modest price in 1997, at a time when the company was controlled by US entrepreneurs. These rights have since been scaled back in two successive rounds of negotiations, but are still extremely generous. And the fact remains that ERHC is little more than a paper company with no operations and just one favourable contract in its portfolio. ERHC has only one full-time employee on its payroll – chief executive Ali Memon. It has never drilled an oil well or produced a single barrel of oil anywhere in the world. And it has very little investment capital at its disposal. According to regulatory documents published in the United States, the company is financed entirely by loans from Offor’s Nigerian business empire. Nevertheless EHRC has negotiated pre-emption rights to several offshore blocks in the JDZ and an exemption from paying any “signature bonus” on its entitlements. Whereas other oil companies awarded acreage in the JDZ must pay a front-end fee to the Nigerian and Sao Tomean governments amounting to tens of millions of dollars, ERHC is not required to pay a cent. There were gasps of amazement when Nigeria and Sao Tome announced on 31 May that ERHC had won the right to be co-operator of two of the five blocks in the second licensing round and had been granted minority equity stakes in the remaining three. Faced with the surprise withdrawal of Noble Energy as its partner in Block Four, ERHC tried to bring in Addax Petroleum, a Swiss-based company with a record of fast track oilfield development in Nigeria, as its substitute. Branco said Sao Tome’s National Petroleum Agency immediately objected to this arrangement, although he added that Nigeria appeared happy to accept it. Nigeria must agree any changes What happens now to ERHC and the other newcomers to oil exploration which were awarded equity in the second licensing round, remains to be seen. The Attorney General’s report has been submitted to parliament, which is due to debate it shortly, to the government and to President Fradique de Meneses. But the weight of its conclusions may be undermined by the fact that the Attorney General is personally engaged in a blazing political row with Justice Minister Elsa Pinto over other matters. President Meneses meanwhile appears inclined towards compromise with Nigeria, whose threat of military intervention enabled him to return to power after an attempted military coup in 2003. He told Reuters in an interview earlier this week; “If we cancel the licensing round we must also obtain the agreement of the Nigerian side. We cannot cancel alone.” Under the terms of a 2001 agreement establishing the JDZ, Nigeria is entitled to 60 percent of all oil and gas revenues from the formerly disputed waters. Sao Tome gets 40 percent. Although Meneses renegotiated a better deal with ERHC in 2003, two years after he was elected to power, the company still enjoys generous preference rights when it comes to awarding offshore acreage. If all the companies awarded equity in the second licensing round paid their share of the signature bonuses agreed, Sao Tome would receive over $113 million in front-end payments. But government officials say that because ERHC is exempt from paying signature bonuses on the percentage of equity in each block on which it has pre-emption rights, Sao Tome stands to receive only half that sum – around $55 million. The lost income is equivalent to a decade of foreign exchange earnings from cocoa, which is currently the main export of this twin-island state of 140,000 people.