For these serious and studious investors, the main question is how ERHC Energy will pay for its share of development costs whether it wins operatorships or only its preferential option rights.
The consensus was that we'll need to give up some of our interest - probably in Blocks 2, 3 and 4, which are rated the most desirable right now - in exchange for financing by our partners, Pioneer Natural Resources (in blocks 2 and 3) and Noble Energy (in Block 4). Note that Devon Energy, which is partnered with Pioneer apart from us but on Pioneer's interest in ERHE in Blocks 2 and 3, does not have a Memorandum of Understanding with ERHE and may not then - although logically they would - be a carrying partner.
highlife40 succinctly stated the problem:
The daily charge for a deep water drillship will run around $200K plus or minus $25K at this time. Go to Rigzone and look under rigs and then cross-reference it for deepwater drillships and you can get an idea of drilling cost on a daily charge.
Also, while you're there, look up availability and time to move on location.
Now, factor in if you want to reshoot 3D in the locations you're interested in. Location of the drillship is critical.
Crews are important: Do you go with the drill company's crew or supply your own?
Drill-string design is important. Geological studies of the drill string will occur while drilling, and [will you] cross-reference to other wells that may be in the area? If no wells to compare to, now you're doing a pure exploration well.
I know little of the 3D we are using, and the new drilling technology is a plus.
There is more to drilling a well in the waters of the JDZ then moving a drillship in and setting up your rigging for drilling.
Time is not your enemy; ingorance of the zones your drilling into is. Slowly, and accurately will pay more dividends.
A guesstimate of costs could be as low as $70 million and as high as $250 million to [complete] the well. It could be more, so my numbers are only a guess. But [it is] one based on knowledge of offshore drilling. This figure does not include production equipment so I will leave that up to the production people.
All of what I have described above is in brief terms. In-depth awareness of this process takes time and knowledge. I only touched the surface.
mabenn1 offered a response to someone who asked about dilution of the share price by issuance of new shares or by givng up some of our rights percentage. Here's his response:
OK - you guys talk about carried interest and dilution like they are two totaly different things. Please tell me the difference between giving up 10% of your rights (and thereby 10% of your future revenue stream), or diluting your outstanding shares by 10%. Either event should have exactly the same effect on the PPS.
Wx_Gssr weighed in with this:
Perhaps partner carry in 2,3,4 but bank financing or dilution for 5,6. Seems to me different scenario would require different tool to be used.
mabenn1 said:
Suppose NBL/ERHE only get 25% in blk 4. Further suppose that the participation agreement does actually provide for NBL carrying ERHE. The carried portion of ERHE's interest still has exactly the same value to NBL as it did before. NBL still pays an appropriate pro-rata share of the exploration costs, they just have a smaller piece, and consequently, lower costs.
From another angle, I have been involved in a number of teaming agreements (not in the oil industry) and I can say that I have never seen a teaming agreement that leaves one participant out in the cold. That's the point of a teaming agreement, to join forces and leverage each other's strategic strengths to provide a higher probability of success (i.e. winning the business). It's not much of a teaming agreement if one partner can get left behind.
From walldog0, who happily has returned to us from the wilds of TOS, comes this:
ERHE will be carried by our JV partners....
On the financing end of things, ERHE will have to give up a certain percentage of the blocks to do this....its called OPM and Offor is a genius at it.
Offor will be very unlikely to dilute ERHE to an outside funding source, as this will dilute his own holding in ERHE, which is substantial.
OPM..."others peoples money"....Emeka Offor wrote the book!
And mabenn1 adds:
I think the only financiing issue is up to the first successful well. Then you have down hole data and some degree of proven reserves. Financing problems disappear at that point. So even if it costs a billion dollars to develop a field, it should only be on the order of a couple hundred million or less to get to first oil, and ERHC is only responsible for 30% or less of that. So I guess my guesses were not totally out of the ball park.
I do have a problem with seeing how we get carried in Blocks 5 and 6. I still think that was the whole point of the agreements with PXD, NBL, and DVN. It allowed us to negotiate the carried interest up front - IMO.
This is a much bigger problem on blocks 5 and 6 where we do not know who the winners are, or if we have been informed, it was fairly recently, so no time to negotiate much of a deal, assuming the other participants are even interested in or capable of carrying us.
stockhocker70 also considered the issue, and said:
Yes, [Blocks 5 and 6] are tougher to figure out. At least in 6 we don't have to come up with signature bonus money, and we know they won't be fast-tracking those blocks like 2,3,4. So, perhaps a hit in 2,3,4 gives us a finance opportunity just in time for the others, a year or two (or more) later. And you're right, getting a little proven under our belt opens up a lot of options.
Another hot topic has been the new requirement of the Nigerian government that indigenous firms must pe partnered with multinationals in at least 10 percent of the acreage multinationals may win in Nigeria's 2005 licensing round for 61 blocks on offer, including 12 deep-offshore blocks and some in Nigeria's prolific shallow waters.
While this discussion does not affect the 2004 round, in which ERHC Energy has taken a lead role, many investors expect the company to one day bid in other Nigerian blocks. And besides, there's no news yet on ExxonMobil.
At a London "roadshow" where chief economic advisor Dr. Edmund Daukoru spoke to investors, there were a number of complaints about the requirement from companies who weren't sure they want to be partnered with Nigerians.
In the past, the Nigerian companies who won oil concessions have simply resold them upon winning; that will be prohibited this time around, but investors were still unsure whether the locals can be counted on to pay their fair shares of development costs. Daukoru assured the investors in London that the locals would be pre-screened. It didn't seem to reduce the anxiety.
Here's how Reuters put it:
Under current guidelines, the government would vet potential local services companies and provide international investors with a shortlist of approved companies from which they could choose a partner.
The initiative is aimed at boosting the participation of Nigerian companies in the oil sector. Local companies would not be allowed to sell equity to foreign investors to raise capital, as they have done in the past.
But investors said the requirement could backfire without further clarification, as if local companies could not provide their share of the investment necessary for oilfield development, international investors would have to find the extra cash.
...
"We are looking at going into Nigeria, and the ideal thing if we do is to have a local partner," said Dr Tunde Salami, commercial analysis manager for exploration and business development at BHP Billington . "That is already for us a partnership risk."
"So then if you take the leap of faith and invest, you don't want to be forced to do it with a company you don't know much about."
Nigeria's Presidential Adviser on Petroleum Edmund Daukoru said there was room for some negotiation on the issue ahead of the bidding round in July.
Daukoru also offered iron-clad assurances that the House of Representatives' plan to sharply increase taxes on explorer discoveries would not happen, Dow Jones reported:
There were also concerns about efforts by the Nigerian legislature to collect higher taxes and royalties from companies drilling for oil.
"I can guarantee absolute protection in terms of these sensitivities," Daukoru said.
President Olusegun Obasanjo is thinking ahead for his troubled nation as these new requirements come into effect. It makes a lot of sense for Nigeria to develop its own energy establishment, complete with mainland and offshore drillers, service firms and refiners.
Managing to do that would go a long way to solving critical unemployment issues and make the country less vulnerable to the energy industry's periodic shocks. What Obasanjo must avoid is the tendency to strongarm multinationals that has characterized talk about local content in the Nigerian House of Representatives.
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