ERHC 'Hit The Jackpot', Houston Chronicle Says; An Explanation Is Offered For Week's Selloff

There;s a new and very upbeat story from this weekend's Houston Chronicle by David Ivanovich, the writer whom we contacted earlier this year and persuaded to write the front-page piece that ran in early February,

The story accomplishes something very important: It tells us that the firms we partnered with and ERHC Energy ahave agreed to pay much higher signature bonus fees than we first bid. We bid $57 million for Block 4, which we won, but we agreed to pay what Anadarko bid, which was $90 million; likewise, we bid $50 million for Block 2 but with our partners Devon Energy and Pioneer Natural Resources will have to pay $71 million instead.

That combined $53 million in additional signature bonus fees - which will be less onerous for ERHC because its options on part of each block were bonus-free - may account for much of the the very substantial selloff we experienced over the past week. The money will have to be paid soon.

ERHC Energy has a 30 percent bonus-free option in Block 2, meaning we may have to split the remaining 35 percent, or $24,950,000, with Devon Energy and Pioneer Natural Resources, and our share of a three-way split would be $8,283,333.

Similarly, we would have to pay half of the additional 35 percent, or $31,500,000, of Block 4 we acquired with Noble Energy, which would be $15,750,000. The total ERHC Energy has to pay for Blocks 2 and 4, if this reasoning accurately reflects the circumstances, is $24,033,333.33, or roughly 36,974,358 shares at an average value of $0.65, or 40,055,555 shares at an average value of $0.60.

In addition, we have to pay 5,550,000 for our 15 percent share of the winning Block 5 bid of $37 million.

That brings our total requirement to $29,583,333, or 49,305,555 shares at an average of $0.60 and 45,443,589 shares at an average of $0.65. We probably have about 26 million shares to go, or some 10 to 25 days of trading, before the price will rise significantly - barring exceptionally good news.

The past week some 31 million shares traded. Some of them could be the 25,407,122 shares Offor purchased at market at around $0.40 each on December 21, 2004. From the SEC filings, I believe these are control but not restricted securities and can be sold freely at a $5 million profit at the current price.

If recent history is any guide, ERHC Energy will bounce sharply back from this last selloff once the news of the larger block payments has been absorbed and the cash has been raised to pay them. We should be grateful to David Ivanovich for being the first reporter to clarify this thorny issue for all of us.

Here is his story:

June 4, 2005, 11:21AM

Unknown hits offshore jackpot
Obscure local oil firm is chosen to work leases off Nigeria, São Tomé
By DAVID IVANOVICH
Houston Chronicle Washington Bureau

WASHINGTON - An obscure Houston oil company cleaned up in the bidding for some potentially lucrative blocks off Nigeria and São Tomé and Príncipe.

ERHC Energy has been awarded equity stakes in five different blocks in West Africa's oil-rich Gulf of Guinea, in waters believed to hold more than 11 billion barrels of crude.

"ERHC is now in league with the big boys," said Phil Nugent, an ERHC investor.

But the bidding process run by Nigeria and São Tomé and Príncipe's Joint Development Authority has been mired in controversy, helping to spark a political crisis in the tiny, turbulent nation.

ERHC, controlled by a wealthy Nigerian businessman, began talks with São Tomé and Príncipe's government about a possible oil deal long before other companies would give the twin-island nation a second glance.

Those roller-coaster negotiations were marked by corruption accusations, international arbitration and threats of arrest. But eventually the outfit with no experience in the offshore was granted preferential rights in the offshore acreage of the two countries' joint development zone.

Realizing ERHC could open the door to waters where they might make a blockbuster discovery, U.S. independents Devon Energy Corp., Pioneer Natural Resources and Houston's Noble Energy Corp. agreed to team up with the virtual unknown.

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
And this week, a Devon-Pioneer-ERHC consortium won a 65 percent stake and was named operator of the development zone's Block 2, while a Noble-ERHC alliance was awarded rights to explore the much-sought-after Block 4.

Devon, Pioneer and ERHC also will be minority partners in a block operated by Houston-based Anadarko Petroleum Corp., while ERHC will enjoy stakes in two other blocks.

Like ERHC, super-major Exxon Mobil Corp. had preferential rights to claim stakes in two of the offshore blocks. But the Irving-based company decided not to exercise those rights.

The bid results were controversial because the winners weren't always the parties that had initially agreed to pay the highest upfront payments, known as "signature bonuses."

Anadarko, for instance, had agreed to pay a $90 million signature bonus for the rights to explore for Block 4, while Noble-ERHC had agreed to pay only $57 million, International Oil Daily reported. The Noble-led group was then asked to submit a new bid to match Anadarko's proposal.

Likewise, the Devon-led group was asked to submit a new bid to match a higher bonus offered by an Indian oil company, Oil Daily reported.

A statement from the Joint Development Authority announcing the winners, said the winning signature bonus for Block 4 was $90 million and the winning bonus for Block 2 was $71 million.

Officials from Devon and Anadarko declined to comment. A spokesman for Noble could not be reached for immediate comment.

Stung by accusations of corruption, the Joint Development Authority issued a statement, noting: "Other details pertaining to the commercial and technical aspects, including the work program, ... were given due consideration during the exhaustive bid evaluation process."

On Thursday, São Tomé and Príncipe's prime minister, Damiao Vaz de Almeida, abruptly resigned, accusing the government of signing deals with companies "of doubtful credibility and inadequate technical ability," the Associated Press reported.

david.ivanovich@chron.com