JDZ Awards Next Week, UpstreamOnline Says

Barry Morgan, the prize-winning reporter for UpstreamOnline who has covered the Gulf Of Guinea block auctions by the Nigeria-Sao Tome and Principe Joint Development Zone since its inception, reported shortly after midnight GMT that all outstandng issues regarding ExxonMobil's rights in the five blocks of the zone that are now on offer have been resolved, setting the stage for awards next week - and he again indicated that ERHC Energy (OTC BB symbol: ERHE) may be a big winner, perhaps at XOM's expense.

Here is the story from last night's editions of the highly-regarded petroleum industry's insider journal:

The JDZ issue is finally resolved

00:18 GMT

EXXONMOBIL has finally decided where it stands in the Gulf of Guinea licensing round, jointly managed between Nigeria and Sao Tome & Principe, writes Barry Morgan.

The company will likely take up its priority rights to 25% of Block-2 and 25% of Block-4 in the Joint Development Zone (JDZ), as agreed under an international protocol signed before the current licensing round.

After weeks of agonising over whether to pull out following abortive attempts to muscle into an operatorship for Block-4, the company opted to cut its losses and take its due. Meetings will resume with Nigerian authorities on 21 March.

ExxonMobil already exercised its right to 40% of Block-1 under Chevron-Texaco's operatorship but failed to bid on either first or second round blocks, therefore rendering it impotent to stake its claim for a larger role.

Just how ExxonMobil managed to play its hand so badly in this political game is a question many observers are asking, as minnows in league with mid-sized companies look set to win the big prizes. Following months of procrastination, the Abuja-based Joint Development Authority set up to manage natural resources in the zone, finally forced the supermajor to take action.

ExxonMobil is understood to have sought operatorship of its own interests through the backdoor based on its relations with Sao Tome and the clout it wields with the Nigerian government. Yet the municipal and international law governing the JDZ enabled Nigerian petrocrats to stand firm, allowing only those bidding to emerge.

ExxonMobil had until 18 March to make its pitch but is understood to have elected under pressure to put bidding suitors out of their misery ahead of deadline. Equity breakdowns on all blocks, including operating stakes, will still have to be approved by the JDA and ratified by a meeting of the Joint Ministerial Council.

It is envisaged that junior equity positions will be decided for second round offerings (blocks 2, 3, 4, 5, 6) before the end of next week, along with the operators. US minnow ERHC Energy has priority rights to several blocks but also bid for operatorship with US partners Pioneer Natural Resources and Devon Energy (blocks 2 & 3) and Noble Energy (block 4).

Nigeria recently relaxed its rule restricting local independents to 10% of equity in deep-water offerings in this year's round to licence the Exclusive Economic Zone (EEZ), raising the bar to 20%. However, it remains unclear how this would play with the JDZ where the round, governed by international treaty, is close to closing.

Sao Tome also wants to launch its own EEZ round this year, competing with Nigeria.

Morgan has suggested in earlier stories that ERHC may take as many as three operatorships in this round, and that possibility seems to gleam through the klines of today's report.

Is First Atlantic Selling Shares?
There is little doubt that anticipation of the coming awards will drive the share price upwards, as many longs have hoped, and may reduce some of the apparent insider selling that has depressed the price in recent days despite strong support from a front-page Houston Chronicle story last Sunday.

The selling,in my opinion, may originate with First Atlantic Bank of Nigeria Plc, which has vastly increased its asset base in the months following a transfer of some 63 million shares from ERHC Energy chairman Sir Emeka Offor, who was sued by the bank in Houston federal court over an unpaid loan and settled the matter with the shares on Nov. 10. 2004.

While the First Atlantic Bank shares are supposedly restricted for a year, the bank has made no SEC filings concerning them despite being a 9 percent owner of ERHC, and it is unclear how U.S. securities laws would impede the bank's transfer agent from selling the shares if it wished. The only statement of the bank's ownership has appeared in ERHE's own SEC filings.

There is little other explanation for the massive 10 percent sell-0ff that investors saw after the highly positive Houston Chronicle story, headlined "Tiny Player Strikes Gold In Huge Oil Deal."

Buoyed by the story, the price soared $0.115 for a 20 percent gain before a wave of selling drove it from a high of $0.695 to $0.63. As in another instance in December when the share price soared, many long-term holders have asked, "Where are the shares coming from?" The answer, again in my opinion, almost certainly seems to be the First Atlantic Bank shares.

The bank, which did not have enough assets to remain viable under Nigeria's newly-enacted bank-capitalization laws, saw its own stock rise and its assets soar from less than Na. 25 billion to Na. 32.7 billion, with little evidence of corresponding new depositors.

If indeed they are the bank's shares that are being sold, it is uncertain whether anyone but the stock's transfer agent would have committed an SEC violation, and there is currently no certainty that the transfer agent is located in the United States or subject to U.S. regulatory regimes.

The issue is a vital one for investors who fear that the long-awaited awards may be robbed of their benefit by massive selling aimed at taking profits for the bank. A major ERHE investor known as Ruby1100 has cut his forecasts for a post-awards high in recent days from well over a dollar to the $0.78-$0.95 range, prompting some other investors to follow suit in formulating their own exit strategies.

Much surely depends on whether Barry Morgan's optimism about the operatorship awards is borne out by the announcements expected next week. A trio of operatorships would surely clear the decks, and possibly lead to prolonged buying that would exhaust even the bank's cache of shares in a matter of days.