Survival Of The Fittest

?There is an old saying that implies that the best surprises often come in small packages.

Take, for instance, ERHC Energy Inc., a very small company that once had a very large concession in São Tomé and Príncipe. The company originally approached the tiny nation to discuss environmental remediation. But the location of São Tomé and Príncipe – nestled in waters adjacent to huge oil fields offshore Nigeria and Gabon – quickly caused the company to reassess its interest.

“There seemed to be an opportunity offshore,” said Peter Ntephe, president and CEO of ERHC. “On the western side, the waters abut Nigeria, and on the eastern side, the waters abut Equatorial Guinea and Gabon. Here is this country bang in the middle of these oil-producing territories.”

ERHC established an exclusivity agreement with the government stating that the company would help the country set up an oil industry in exchange for a large percentage of the revenues accruing from any eventual production. Then things started to go very badly.

Piquing interest

Peter Ntephe
(Image courtesy: ERHC Energy Inc.)

As a public US company, ERHC was bound to report this agreement. Bigger players who formerly had shown no interest in the region suddenly sat up and took notice.

“Off the top of my head I can think of three or four countries where the same thing has happened,” Ntephe said. Already ERHC had helped the country set up a national petroleum agency, but with other players interested, São Tomé and Príncipe decided to renegotiate the deal, even going into arbitration at one point. The company was in trouble.

“Funds had been raised to do this in the expectation that returns would start at a particular time,” he said. “Once the problems started, those returns didn’t come when expected, and the progress needed to continue to have financing lines open wasn’t happening.” Company officials also had decided to abandon their other businesses to make São Tomé and Príncipe the company’s sole focus, meaning the company had no way to diversify its portfolio. According to Ntephe, the owner of the business began looking for buyers with “sufficient faith in the prospect and sufficient financial power” to turn the company around.

A West African businessman who runs the Chrome Group took an interest, and that firm became a significant shareholder in 2001. It immediately began working with the São Tomé and Príncipe government to renegotiate the terms of the original deal.

“That necessarily involved giving up some of the rights that the company already had,” Ntephe said.

ERHC has acreage positions in São Tomé and Príncipe’s EEZ as well as the JDZ that the country shares with Nigeria. (Map courtesy of ERHC; source ANP-STP)

The JDZ

ERHC went from having exclusive rights to the entire region to getting preferential rights in certain blocks. But by then Nigeria had decided that some of the waters in question actually belonged to it. “Again, this is a story you’ll find in many countries,” he said. “Where the two waters meet, there’s always a dispute, especially when there’s oil believed to be involved.”

Eventually the two countries agreed to establish a joint development zone (JDZ). Companies that already had secured rights in the JDZ retained those rights under the new agreement, including ERHC. Additionally, São Tomé and Príncipe declared its remaining waters an exclusive economic zone (EEZ), and ERHC had preferential rights in some of these blocks as well.

Licensing rounds

The Joint Development Authority for the JDZ held two licensing rounds in 2003 and 2004, and ERHC exercised its rights in the second round. However, its percentage in each block was no more than 25% of the total. Company officials determined that they could not grow the company quickly enough to make bids on their own, so they sought partners with whom they could bid for extra percentages, hoping for operatorship.

“The chairman of the company at the time led a team that virtually crisscrossed the globe looking for partners,” Ntephe said. “It was difficult because we were selling something that wasn’t certain, and we were selling it on behalf of a very small company that little was known about.”

Eventually the company found partners for three of the blocks in the JDZ, resulting in the partnerships bidding for and receiving additional rights and therefore operatorship on those blocks. And again the questions began – the JDZ has had a licensing round, and this little company is the operator – how did that happen?

“We were saying, ‘Where were all of you when we were receiving rejections, when doors were closing in our faces on several continents?’” he said. “‘Where were all of you when we brought in world-class partners and together with them put in bids for the additional rights that made us operator?’”

Despite the success of the strategy, the first three partners subsequently pulled out. Eventually ERHC brought in two new partners, Sinopec and Addax. “There were dark days when we were in trouble,” Ntephe said. “Our business was cooked if we didn’t get replacement operators. So it was more phone calls, cold calling, and working all of our networks.”

Under investigation

More bad news was to come. Barely a month after signing production-sharing contracts with the two partners, ERHC came under investigation due to its acreage holdings. No charges were filed, but Ntephe said that fraud was investigated. Having always been a public company, ERHC had a significant number of documents that it had to turn over to the investigators, eventually filling 106 boxes.

The investigators turned up nothing, but the pressure affected the company severely. “This was at the point where we had secured the rights, secured significant positions in West Africa, and were ready to build on it,” he said. “That was what was expected. And then the investigations hit.”

The company took a strategy of arresting any retrogression that might have happened and maintaining its position. A lack of rigs made drilling difficult in 2008, but by 2009, ERHC and its partners began drilling, spudding five wells between August 2009 and January 2010. Despite the significant initial setbacks, it still was the first partnership to drill in any of the blocks of the JDZ awarded in the 2004 licensing round. Natural gas shows were found in three of the wells, and they continue to be evaluated.

The exploration phase of the contract has been extended to March 2011 to take into account the fact that rigs were obtained later than initially expected. Ntephe said he hopes by then the partners will have enough information from the first five wells to determine how to proceed. “There is still a lot of acreage, a lot of interpretation, and a lot of possibility,” he said.

Meanwhile, in the EEZ, ERHC has 100% rights with no signature bonus in two blocks and 15% rights with signature bonus in two more. It has exercised its 100% rights in blocks 4 and 11. Once the bids are reviewed, the company again will seek partners to help develop that acreage. It is not likely to be as hard a sell this time.

“We now have a track record because we’ve done this successfully in the JDZ,” he said.

The company also now has a more diversified portfolio with acreage in two separate areas, and it will continue to explore West African waters. With several West Africans in positions of power at the company, Ntephe believes ERHC has a bit of “home-field advantage” over other companies that might not be as familiar with local customs.

“When people ask how we’ve done it, it’s because we know the terrain; we know the lay of the land,” he said. “Even though we are an American company, when we walk into the room, the people we’re visiting think, ‘Those guys sure look familiar.’”

But he also sees a uniquely American aspect to ERHC. “Where other people see constraints, we see opportunity,” he said. “These are the fundamental facets of the American dream.”