Deconstructing Reuters' Sao Tome Probe Report

I think it might be useful to expose some of the subterfuges under which the Sao Tome and Principe Attorney General's office, with the help of R. Dobie Langenkamp, torpedoed ERHC Energy's stock on Monday while revealing so little about new allegations, if any.

Sao Tome to ask U.S. to probe ERHC oil contracts
Mon Dec 12, 2005 12:51 PM ET
By Zoe Eisenstein

SAO TOME, Dec 12 (Reuters) - Sao Tome will ask U.S. authorities to investigate contracts awarded to Houston-based ERHC Energy (ERHE.OB: Quote, Profile, Research) following a probe into alleged irregularities in an oil exploration licensing round.

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A report by Sao Tome's Attorney General's office said there were repeated suggestions that Nigerian-controlled ERHC made improper payments to officials and their families during the award of oil blocks in a joint development area shared with Nigeria.

My comments: "there were repeated suggestions" is a scary way of saying the same stories have been repeated over and over, without evidence to back them up. The "improper payments" alleged were required by a 2003 contract addendum; ERHC was required to pay for the schooling of Sao Tome students - well-connected ones - to develop some local expertise in international finance.

"Key officials in the past have been reported to have solicited bribes, and ERHC has provided known benefits to the families of key decision makers," said the report, a copy of which was obtained by Reuters.

My comments: "in the past" is a key observation; these allegations were made in the long-ago past, insofar as the JDZ is concerned, and the fact that Sao Tome officials were asking for bribes was revealed at a press conference at the Sao Tome airport in 1999 by the-then chairman of ERHC! The "known benefits" are those mentioned in the first paragraph, which are indeed well-known, being part of of ERHC's contract obligations.

"Such payments would be a violation of Sao Tomean law and make the contracts voidable," the report said.

My comments: "would be" is right - if the laws in force now were in force when the "payments" - a $100,000 campaign contribution in 2002 - occurred. The probity of applying new law to old facts is something R. Dobie Langenkamp should study.

"The office intends to refer this matter to the U.S. Department of Justice and the Securities and Exchange Commission and to seek their assistance in investigating whether violations of U.S. law have occurred."

My comments: "The office intends to refer this matter" leaves one believing that the Attorney General's office is an appropriate instrument of international diplomacy, a nicety that is overlooked when you want to create the impression that our Justice Dept. and the SEC work outside of normal diplomatic channels to investigate bilateral relationships in which we have no part. Its desire for "their assistance" in determining "whether" U.S. laws were broken is certainly a very charitable effort on the Sao Tome AG's part. After all, what other country investigates foreign business partners on the basis of the foreign country's laws? He doesn't want assistance: the Attorney General is no doubt hoping that ERHC Energy will be joined to the racketeering probe being conducted by the U.S. Senate Commerce Committee of bribes allegedly paid to the president and other government officials in Equatorial Guinea by ExxonMobil, Devon Energy, Noble Energy, Marathon Oil and others in connection with the licensing of oil blocks in that country. However, there is one element missing: Chrome is not an American company, and campaign contributions are not bribes and fulfilling contractual obligations to Sao Tome is not illegal.

U.S.-listed ERHC, which Sao Tome says is controlled by Nigerian company Chrome, was the biggest winner from the licensing round for five blocks, gaining the joint control of two blocks and stakes in the three others.

My comments: It's a sin to win. It reminds me of the holiday party we had in kindergarten when we played musical chairs. i was a little faster on my feet than others and I kept winning. Finally, the nun got peeved and said, "Joe, you can't win all the time!" Except in the business and legal world, where you try to, and if you succeed it's not supposed to be wrong.

Asked about the report, ERHC President and CEO Ali Memon said his company had acted at all times in consortia with U.S. companies.

My comments: ERHC Energy's reticence about the bl;ock awards is better understood now. The company took a hands-off approach to the negotiations, allowing their better-heeled and better-suited partners do the jawboning with the JDA and the Jont Ministerial Council. The company issued no press releases, talked with no Sao Tome officials, and in general did nothing as the lawyers for Noble, Devon, and Pioneer worked their way through the thicket of regulations, contracts, deadlines and bidding rules towards a victory they earned on their own behalf but which required them to include ERHC Energy because of our pre-existing treaty rights.

"Whatever we have done from the time of the submission of the bids, we have acted in consortium with other major U.S. companies," Memon told Reuters. "ERHC has had no contact with any Sao Tomean officials whatsoever through the bid process."

The round, which concluded in May, was the second held in the Joint Development Zone (JDZ) shared by the two neighbours in the Gulf of Guinea.

My comments: The first one went nowhere, too. Nine blocks were offered and one was awarded.

The Nigerian attorney general's office had not cooperated in the probe and no Nigerian officials had testified, the report said.

My comments: The Nigerians did not cooperate because they knew exactly what it was all about: undoing the awards so that ExxonMobil and Anadarko Petroleum could get Block 4, in particular and screwing Nigeria, in general.

The preferential rights granted to ERHC would, if executed, result in a loss of $58.6 million in revenues for Sao Tome, the investigation concluded.

My comments: Recalling that it was President Fradique de Menezes who renegotiated the contract with ERHC is useful at this point. He agreed to the terms that gave ERHC Energy signature bonus-free rights to equity in the Joint Development Zone Blocks 1 through 9, and has repeatedly defended the agreement.

Separately, the attorney general's report noted the conditions of ERHC's agreement were so favourable they might violate Sao Tomean law by "alienating" -- signing away control over -- its natural resources.

My comments: "so favorable" that after three years and two rounds of bidding, ERHC has not gotten a single cent in return for its investment of millions of dollars in the rounds. Moreover, ERHC's rights in the Sao Tome are subordinate and inferior to those of Equator Exploration and partners, and in the JDZ are very similar to the rights granted to ExxonMobil, which is clearly connected to real bribery in a neighbor country. So, at the very least, a foul form of favoritism is festering here.

"Apart from fraud, Sao Tome and Principe should again reexamine whether there are grounds for terminating the contract," the report said.

My comments: "should again reexamine" is a choice phrase, as it accurately depicts the fact that such a reexamination would not be the first such reexamination; it would be at least the third reexamination of old facts that are friendly only to gossip, not to international law. The "Apart from fraud," to me, means "since we don't have any evidence of fraud - just 'repeated suggestions' -
let's try something else that will appeal to our ostensive sponsors, the Earth Institute."

Expressing concerns over the financial and technical qualifications of some of the companies awarded blocks by the Joint Development Authority (JDA), the inquiry suggested some of their partners might simply withdraw.

My comments: Note that ERHC Energy was not mentioned in this sentence, because they have technical partners of finest kind in Pioneer Natural Resources and Addax Energy, not to mention Chrome's partnership with the Chinese National Petroleum Co., India's Essar Oil and other very experienced players in the bidding for the Port Harcourt Refining Company.

"One immediate challenge to the JDA may be the partial collapse of the second round itself," the report said, noting none of the groups awarded blocks had finalised production sharing agreements with the JDA.

My comments: "partial collapse" means the part involving Block 4, which is beng so viciously sought by ExxonMobil and Anadarko Petroleum that they are willing to risk the future of the JDZ, the financial well-being of Sao Tome and the bitter wrath of Nigeria to get their hands on it. They will not succeed.

The report said top U.S. independent oil producer Devon Energy Corp. (DVN.N: Quote, Profile, Research) and Noble Energy Inc. (NBL.N: Quote, Profile, Research) had already withdrawn from two groups where ERHC was a partner.

My comments: Yes, they did, but not because they were teamed with ERHC Energy; they withdrew, as both indicated later, because the economics were not right. Those "economics" did address the third-tier players in several blocks whose rights were inimical to larger profits for the big players who walked. Those who did walk, including ExxonMobil's refusal of two 25-percent equity positions in any of the five blocks on offer in the Second Round, are already under investigation for bribery, however, and may have been more sensitive than ERHC needs to be, since it has done no wrong.

The investigation recommended the JDA should simplify the bidding process, making it more transparent and reducing the number of variables open to bidding.

My comments: If it was just a matter of throwing money at the JDA, the winner would have been some outfit no one ever heard of that actually offered $190 million for one block, but didn't have two dimes to rub together.

International observers should be invited to observe the process and members of the JDA should be made to disclose any interests, the report concluded.

My comments: If you like watching paint dry, observing this process is a job for you. But we agree with the disclosure rule - after all, we own 93,000 shares of ERHE.