Houston, We've Got Ignition! Chronicle Does Us Proud

The Houston Chronicle, America's seventh-largest daily newspaper, today published the story by David Ivanovich suggested by ERHC On The Move - and what a story it is! We can only be grateful to this terrific journalist and great newspaper, the premier voice of America's oil patch.

It's a Page 1 story with a great headline that jumps to a full page inside, complete with color charts and maps.

Need a link? Try:
http://www.chron.com/cs/CDA/ssistory.mpl/front/3082404

Otherwise, here's the story, world!

March 13, 2005, 7:32AM

Tiny player strikes gold in huge oil deal
African nation promises local ERHC Energy a share of profits
By DAVID IVANOVICH
Houston Chronicle Washington Bureau

The impoverished West African nation of São Tomé and Príncipe may soon become the world's newest oil exporter, and its leaders have entrusted the country's great hopes to an obscure Houston company.

The winner of this prize: ERHC Energy, which has one full-time employee, $21,000 in cash and no experience drilling offshore.

This little-known company, based in a Westheimer office building, has been promised a share in a potential crude bonanza in the Gulf of Guinea.

São Tomé and neighboring Nigeria have been evaluating bids from oil companies wanting to drill in waters that are believed to hide more than 11 billion barrels of crude.

Five offshore blocks in a joint development zone are up for grabs. Little ERHC has been guaranteed a cut in each one.

"I've never heard of anything like it, anywhere in the world" — at least not since Africa's colonial days, said Jedrzej George Frynas, a lecturer in international management at England's University of Birmingham.

Exxon Mobil Corp. has been granted rights to claim a stake in two of these blocks. The oil industry is watching to see whether the world's largest publicly traded company will jump in with this strange bedfellow.

ERHC's aggressive, penny-stock investors are all but salivating at the prospects. On Web sites such as www.ragingbull.com or Bradenton, Fla., investor Joe Shea's weblog, erhc.blogspot.com, they trade tips and rumors as they await word that the blocks have been awarded.

"I'm a little disappointed that I'm not already a millionaire," Shea said.

The story of how this small company gained such influence is drawn from interviews with government leaders, company officials, diplomatic sources, human rights groups, Africa specialists, and oil and gas analysts.

Eight years ago, ERHC officials waded out to remote São Tomé before others in the oil industry were willing to give the twin-island nation more than a passing glance.

The company has since negotiated a series of deals its competitors can only envy.

Critics say ERHC took advantage of a commercially naive government with no experience in the oil sector.

But despite successive political uproars over its contracts, threats to jail the company's chief executive officer and revelations of a $100,000 payment — not to mention a coup attempt — ERHC has held on to its prize.
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RESOURCES

TIMELINE
A short history of ERHC Energy:
• 1986: Colorado-based Regional Air Group Corp. is formed. The company later evolves into an environmental cleanup firm known as Environmental Remediation Holding Corp.
• 1996: The company reinvents itself again as an oil and gas producer.
• 1997: ERHC officials explore oil opportunities in São Tomé and Príncipe, an island nation off the West African coast.
• 1998: ERHC helps establish a state-owned oil company in São Tomé and takes a 49 percent stake in the entity. What's now Exxon Mobil provides technical assistance and earns its own special rights.
• 1999: The deal collapses. ERHC CEO Geoffrey Tirman accuses São Tomé's lead negotiator of demanding bribes. The government cries "sedition," and Tirman is forced to flee.
• 2001: Nigeria and São Tomé sign a treaty to create a joint development zone. Tirman sells his stake to wealthy Nigerian businessman Emeka Offor, who negotiates a new deal. ERHC moves its headquarters to Houston.
• 2002: São Tomé's new president, Fradique de Menezes, again demands a new agreement.
• 2003: ERHC successfully negotiates current agreement. De Menezes acknowledges Offor made a $100,000 campaign contribution. A coup attempt in São Tomé fails.
• 2004: ERHC teams up with Pioneer Natural Resources, Devon Energy and Noble Energy to bid on three offshore blocks.
Source: Chronicle research

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Known for its stamps

Straddling the equator, the nation of São Tomé and Príncipe is a former Portuguese colony of 150,000 people.

For generations, its economy was dominated by cocoa and coffee exports, and stamp collectors knew São Tomé for its Elvis Presley and Marilyn Monroe stamps.

But São Tomé also is in the hydrocarbon-rich Gulf of Guinea. And as oil producers pushed out into ever-deeper waters hunting for crude, São Tomé took on a new luster.

Enter ERHC. Founded in 1986 as Colorado-based Regional Air Group Corp., the firm has morphed through several business plans — airlines, environmental cleanup and now oil and gas producer — and has undergone three major management changes.

At fiscal year's end last September, nearly 10 percent of the company's stock was controlled by Nigeria's First Atlantic Bank.

The bank was issued the stock to settle a lawsuit against the company's chairman, Nigerian billionaire Emeka Offor, and his various business interests, including ERHC. First Atlantic, seeking repayment of a $57 million loan, had accused Offor of fraud.

And no one really knows, yet, whether all the great expectations will prove true.

West Africa accounts for 15 percent of all U.S. oil imports, a figure that is expected to rise in coming years. And the Gulf of Guinea has been prolific.

But many of the oil prospects off São Tomé are in waters more than a mile deep. And in such depths, fields holding 100 million barrels of crude may not justify the expense.

"Everybody talks about it as if there's no exploration risk," noted Michael Rodgers, a senior director at Washington-based PFC Energy and an expert on West African oil. "No one's drilled a well there yet."


Company came calling

In 1997, executives and shareholders for what was then known as Environmental Remediation Holding Corp. approached tiny São Tomé about developing its offshore resources.

When approached by ERHC, "we had no experience, no know-how," Luis Alberto dos Prazeres, executive director of São Tomé's National Petroleum Agency, said in an interview.

Longtime ERHC investor Phil Nugent is more blunt: "They didn't know pipe was hollow."

Those talks led to the creation of a state-owned oil company.

With the promise of a $5 million investment, ERHC was granted a 49 percent ownership stake in the company.

This initial deal included a pledge that ERHC would provide college scholarships for São Tomé's youth, with the idea of creating a cadre of homegrown oil and gas experts.

São Tomé's lead negotiator in those talks, Carlos Gomes, sent his son to study in the United States at ERHC's expense, the Los Angeles Times has reported. Gomes also took a position in the new state oil company, the Times said, receiving a $4,000 monthly salary paid for by ERHC.

Gomes now heads the Nigeria-São Tomé and Príncipe Joint Development Authority, responsible for awarding the offshore blocks in the Joint Development Zone.

Gomes could not be reached for comment, despite repeated attempts.

Mobil soon signed on to conduct a feasibility study and perform seismic work to evaluate the country's offshore potential.

But opposition to the agreement quickly grew. Critics accused the government of handing over the country's oil patrimony for a pittance. The political opposition insisted the government seek more money.

Relations between ERHC and the government quickly soured.

During a visit to São Tomé, then-ERHC Chief Executive Officer Geoffrey Tirman publicly accused Gomes of demanding bribes.

The government, in turn, cried sedition. Tirman "was threatened with a jail term, so he fled to the airport and took off," Nugent said.

Tirman could not be reached for comment.

São Tomé's leaders also accused ERHC of failing to pay the full $5 million. The deal was off.


Bleak prospects

ERHC sought international arbitration, but its prospects still seemed bleak.

Nugent sought out Offor, who enjoyed not only great wealth but tremendous political clout in Nigeria.

Offor, who holds the titles chief and sir, had been close to Nigeria's last military dictator, Gen. Sani Abacha, as well as to Atiku Abubakar, the country's current vice president.

Back in 1999, Nigeria and São Tomé had begun discussions aimed at ending a longstanding border dispute. Offor assumed a leading role in helping push those negotiations.

In February 2001, Nigeria and São Tomé agreed to create the joint development zone. The pact called for Nigeria to receive 60 percent of the oil revenues from the zone while São Tomé was to get 40 percent.

The treaty cleared the way for Offor to purchase Tirman's stake in ERHC for $6 million. The company's headquarters was then relocated, from Little Rock, Ark., to Houston.

Three months later, ERHC had a new, favorable deal with the government.

Under that agreement, ERHC gave up its claim to an ownership stake in the national oil company. But the firm was promised a share of São Tomé's oil profits, as well as a portion of the signature bonuses other companies would have to pay for the right to drill.

Again, the company's critics were livid. The World Bank and the International Monetary Fund voiced displeasure.

The following year, Fradique de Menezes, São Tomé's new president, insisted the contract was unconscionable and unenforceable.

De Menezes insisted the company renegotiate once again.

Finally, in April 2003, ERHC reached its current deal with São Tomé and the Joint Development Authority.

The agreement grants ERHC rights to take working interests in six offshore blocks in the joint development zone, as well as offshore acreage in São Tomé's exclusive territorial waters.

That means the company can claim a stake in all five blocks being offered, plus an additional block in the future.

Other companies bidding on the blocks must offer signature bonuses, upfront payments for the rights to drill.

Several of the bids for blocks topped $100 million. But ERHC's deal allows the company to forgo making such payments on certain blocks.

Gerhard Seibert of the Institute for Security Studies, an Africa research group, has estimated ERHC's bonus-free options will cost São Tomé coffers $75 million — comparable to 150 percent of the country's annual gross domestic product.

Though that agreement assures ERHC of a minimal interest in these blocks, the company had the right to join the bidding process to win an even bigger stake.

Three large U.S. independent oil and gas producers, Dallas' Pioneer Natural Resources, Oklahoma City-based Devon Energy and Houston's Noble Energy have teamed up with ERHC to bid on three separate blocks.

The idea is they would provide the resources and technical expertise ERHC lacks.

But the agreement again sparked protests. Political opponents accused de Menezes of accepting a $100,000 payment from Offor sometime before the deal was reached.

De Menezes eventually acknowledged publicly that the money had been received, but he characterized it as a political contribution.

Offor declined to comment for this report.

Ali Memon, ERHC's current chief executive officer, said the issue "has nothing to do with ERHC."

"ERHC has not made any payments directly or indirectly to any member of the São Toméan government," said Memon, a native of Kenya and a longtime Marathon Oil Co. executive.

Three months after the deal was signed, military leaders launched a coup attempt while de Menezes was visiting Nigeria.

The putsch quickly fizzled, but the event demonstrated the precariousness of the São Tomé regime.

Throughout these years of turmoil, Exxon Mobil has reportedly steered clear of ERHC.

"Exxon Mobil wished they would go away," Nugent said.

Exxon spokesman LenD'Eramo declined to comment on "speculation or rumor" about the company's attitudes toward ERHC.

The long-running controversy over ERHC's activities in São Tomé helped prod international experts to help the tiny country protect its natural resources.

A group of international law experts at Columbia University crafted an oil-management law to help ensure any new oil revenues don't end up in the pockets of corrupt officials, as has often been the case in West Africa.

Using this blueprint, São Tomé passed a law hailed as a model for resource-rich, Third World countries. "We are in a position to do better than other countries did," the National Petroleum Agency's dos Prazeres said.

But ERHC's contract remained intact.

"São Tomé would be better off if it could get rid of (ERHC's) claims somehow, but I doubt there is any legal standing to do so," said Martin Sandbu, a research fellow at Columbia's Earth Institute.

Dos Prazeres thinks his country needs to begin a search for oil.

"This is the agreement we have," dos Prazeres said. "That's the way it is."

david.ivanovich@chron.com