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Sinking Its Hopes Into a Tiny Nation
Obscure Texas oil firm, amid claims of bribery, secures a deal with poor Sao Tome and Principe.
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May 24, 2003
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By Ken Silverstein, Times Staff Writer
HOUSTON -- Environmental Remediation Holding Corp. has one full-time employee at its headquarters here.
It hasn't reported a penny of revenue for four years and has piled up more than $30 million in losses. Its stock price hovers around 17 cents a share.
Yet thanks to its sole asset -- a contract that gives it a major stake in a tiny West African nation's oil fields -- the obscure Texas oil company appears to be on the verge of a stunning turnaround.
ERHC secured its oil rights from Sao Tome and Principe, an island nation so poor that it supplements its budget by issuing commemorative stamps of Marilyn Monroe, the Beatles and other celebrities.
The company's oil contract, made final last month, gives it rights to two offshore fields in Sao Tome's territorial waters and a significant share in deposits in an area jointly controlled by Sao Tome and Nigeria.
About 4 billion barrels of crude are believed to lie beneath those waters. Without a drilling rig to its name, ERHC could reap hundreds of millions of dollars from its holdings. The company has not revealed its plans, but analysts predict it will sell its interest to one of the industry giants.
That a small energy speculator could get such a lucrative foothold in Sao Tome has mystified experts, who suspect the company benefited from the country's inexperience in the oil business.
Bill Brumbaugh, a Houston energy consultant who advised Sao Tome on its contract with ERHC, says the deal amounts to "a raid on Sao Tome's future national treasury."
The contract has outraged internal opposition groups, which accuse the government of taking bribes. Last month, Sao Tome's president, Fradique Bandeira Melo de Menezes, admitted secretly receiving $100,000 from ERHC's chairman. De Menezes insisted the money was a campaign contribution.
ERHC officials deny bribing the president. They acknowledge winning highly favorable terms and offer no apologies. They say they've spent $12 million so far on the Sao Tome venture, about half in payment to the national treasury and the rest to chart the country's offshore waters and otherwise pave the way for exploration by multinational energy firms.
The original agreement between the company and Sao Tome was signed in 1997. Since then, it has twice been renegotiated, and successive governments have threatened to kill it. Yet the company emerged last month with some of the most generous terms ever bestowed on a foreign oil firm. The beneficiaries include a Nigerian businessman, who owns nearly half the shares, and a handful of Texas oilmen.
"ERHC is in the catbird seat," says Phil Nugent, a Houston-based oil and gas consultant and a major shareholder in the company. "We're going to get our pound of flesh and I think we're due it."
West African Oil Rush
ERHC's dealings with Sao Tome reflect a rush for oil riches in West Africa. The region provides 15% of American oil imports, and the figure is expected to grow to 25% within a decade as the U.S. government seeks to reduce energy reliance on the Middle East.
Major oil producers such as Nigeria and Angola have highly trained energy experts and lawyers and can negotiate on equal terms with big oil companies.
But newcomers with unproven reserves, such as Sao Tome, frequently turn to small European or U.S. consulting firms, which conduct or arrange geological surveys, help write foreign investment laws and try to interest big oil companies in developing reserves. The consulting firms typically collect a flat fee, or make their profit by selling their geological surveys to the big companies.
ERHC, instead, negotiated a stake in Sao Tome's oil fields, including a 14% share of the most promising ones. If the country's reserves weren't as big as believed, or couldn't be exploited, the company would be out its relatively small outlay. On the other hand, if Sao Tome's oil potential was borne out, the company stood to make a vast return.
Andrew Latham, a West Africa expert for Wood Mackenzie, an energy consulting firm in Edinburgh, Scotland, says the Sao Tome-ERHC agreement is far out of line with industry standards.
"There are plenty of examples where a small firm will get in early and help promote a country's oil acreage. Their rewards are relatively minor " Latham said. "I've never seen a company get a stake like ERHC obtained in Sao Tome."
Africa's smallest nation, Sao Tome is composed of two islands with a combined territory of 372 square miles -- about one-third the size of Rhode Island -- and a population of 170,000. The country straddles the equator and is located west of Gabon in the Gulf of Guinea.
Sao Tome gained independence from Portugal in 1975 and, unlike most African nations, is a parliamentary democracy with little history of military involvement in politics. Per capita income is a mere $300, and Sao Tome imports all its fuel as well as most consumer goods and food.
Sao Tome's top export earner is cocoa. Besides issuing commemorative stamps, the country raises revenue by serving as a flag of convenience for the shipping industry and by renting its phone lines to porn operators to route phone-sex calls, a common practice in the Third World since developed countries cracked down on "telesex" businesses a decade ago.
"The country has a national anthem and a flag, but it only exists as an independent state because of foreign financial support," says Gerhard Seibert, author of a history of Sao Tome.
Taiwan, the biggest single donor, agreed to contribute $30 million in 1997 in exchange for Sao Tome's granting diplomatic recognition to the island republic and severing relations with mainland China.
First Contract in 1997
ERHC's interest in Sao Tome's oil grew out of a conversation six years ago between Noreen Wilson, a Washington lobbyist, and an official at Procura Financial Consultants, a South African oil consulting firm.
The company official mentioned that Procura was exploring opportunities in Sao Tome and was looking for an American partner. Wilson's cousin, James Griffin, was on the board of ERHC.
The company, founded in 1986, was involved in waste disposal and cleanup for the oil industry. It had 25 full-time employees, including three petroleum engineers and two geologists. Its contracts included one with Chevron to plug 400 wells in Louisiana.
Wilson said she persuaded the company's chief executive -- then Sam L. Bass Jr., a former wildcatter who had sold oil-drilling equipment to Nigeria and put out oil fires in Kuwait after the Persian Gulf War -- to take a close look at Sao Tome. In early 1997, Wilson, Griffin and several officials from Procura traveled to the islands to speak with government officials.
In short order, they signed a deal. ERHC paid the government $5 million for the right to market the country's oil potential. ERHC, which later bought out Procura's rights, was awarded a minimum of four oil fields and was exempted from all taxes. The agreement also created a state oil company, STPetro. ERHC and the government were to split future profits in STPetro. Wilson was appointed STPetro's president and ERHC's chief financial officer.
"Was the deal a little rich?" asks Wilson. "Yeah, it probably was, but who else was going to take the risk back then? They couldn't give their oil away, let alone get someone to pay them for it."
Wilson said she no longer has an official position with ERHC, but owns millions of shares of company stock.
Brumbaugh, who later advised Sao Tome on how to improve the deal, said ERHC took advantage of the country's inexperience. "The playing field was unequal. So when ERHC asked for the moon, they got it."
The lead negotiator for Sao Tome, Carlos Gomes, wound up with an executive position in the new state oil firm and a $4,000 monthly salary paid by ERHC, according to company officials and corporate records.
ERHC also provided an academic scholarship at the University of Louisiana at Lafayette for Gomes' son, according to Wilson and Jim Callender, a former company executive. The children of two other well-connected Sao Tomeans also received scholarships from ERHC, they said.
"It didn't cost much to get on the right side of key government decision-makers," says Gregory Craig, a prominent Washington attorney who briefly served as an advisor to Sao Tome.
Gomes defended the agreement. "At the time, no one had expressed any interest in exploring for oil in Sao Tome," he said in an interview in London this year. "We didn't have any other offers to pick from."
Gomes did not reply to e-mails seeking comment on the benefits he received from ERHC.
Deals Renegotiated
ERHC paid a geographer to chart Sao Tome's waters and lawyers to file demarcation paperwork with the United Nations. ERHC helped settle territorial disputes with neighboring nations, paying the government's legal fees, travel expenses for Sao Tome leaders and other costs. The company also drummed up oil industry interest in the country's reserves.
ERHC was soon in financial trouble. It had largely abandoned its waste disposal and cleanup activities to focus on Sao Tome, which had yet to yield any revenue. Investors were growing skittish because the International Monetary Fund was encouraging Sao Tome to renegotiate the ERHC deal, which the fund said was overly generous to the company.
In 1999, Bass sold his controlling interest in ERHC to Geoffrey Tirman of Talisman Capital, a Little Rock, Ark., investment firm that was a significant investor in ERHC. At the time, Sao Tome was complaining that ERHC was not doing enough to develop its oil industry.
Tirman traveled to Sao Tome in the fall of 1999 to patch things up but talks with the government of President Miguel Trovoada quickly broke down. On his way out of the country, Tirman held a news conference and accused government officials of asking for bribes. The government denied the allegation and charged Tirman with sedition.
After Tirman apologized, the matter was dropped. But Sao Tome announced it would not honor the contract. Tirman filed for arbitration. Then, in 2001, Tirman sold out to Emeka Offor, a Nigerian businessman. By then, ERHC was little more than a shell.
Offor, a friend and occasional business partner of Nugent, the ERHC shareholder, owns a cargo airline, a bank, a newspaper and major telecommunications interests. He appointed himself chairman of ERHC's board but kept the company's headquarters in Houston.
In response to complaints from Sao Tome officials, Offor renegotiated ERHC's deal in May 2001 with the Trovoada administration.
Under the new agreement, ERHC relinquished certain rights, notably its stake in the state oil company. In return, it was granted, among other benefits, a share of Sao Tome's future oil profits and retained its rights to choice oil fields.
Two months later, De Menezes was elected president and, after taking office in September 2001, vowed to revoke the agreement. ERHC threatened legal action but eventually agreed to yet another renegotiation, which began in earnest this year.
By that point, Sao Tome was eager to sign a deal so exploration could commence, said Brumbaugh, the oil consultant. "They saw Nigeria, Equatorial Guinea, Angola and other countries getting rewards from oil, and they were sucking sand."
The country's lead negotiator was the minister of natural resources, Rafael Branco, whose two children were among those who had received college scholarships from ERHC, according to Wilson and Callender, the former company officials.
Sao Tome's National Petroleum Commission played an advisory role. One of its members was an ERHC shareholder and former company consultant. Two other commission members had been on ERHC's payroll at the state-run oil company. So had two members of another government board overseeing oil exploration in the Joint Development Zone with Nigeria.
Branco did not reply to a request for comment.
The contract, as renegotiated by the Branco-led team, gave ERHC a 14% stake in nine especially promising fields in the Joint Development Zone. It left intact the company's rights in Sao Tome's wholly owned territorial waters, where ERHC has full ownership of two oil fields and a 30% share in two others.
In most of the fields in which it was awarded rights, ERHC was exempted from paying a "signature bonus" -- a one-time fee that oil companies typically pay governments for exploration rights. In West Africa, such bonuses have ranged from a few million dollars per field up to $300 million, the sum ExxonMobil recently paid for rights in Angola.
Chuda Mba, the Nigerian chief executive of ERHC and its lead negotiator, said he had agreed to Sao Tome's chief demand -- that the company relinquish a cut of the government's future oil earnings. In exchange, ERHC asked for and received a larger ownership interest in Sao Tome's oil fields.
"They got what they wanted and we got what we wanted," Mba said by phone from London.
Noreen Wilson was jubilant. "As a shareholder, I'm thrilled," she said. "Everyone was focused on what we gave up and no one added up what we got."
During a public appearance in April, Rafael Branco said the deal marked a "watershed" in Sao Tome's history. "The government and the people of Sao Tome have been keenly waiting for the dawn of this day," he said.
The deal was formally concluded April 10. The next day, an open letter signed by dozens of civic and political leaders accused De Menezes of selling out the national interest.
They charged that the president had received $100,000 from a Bahamian-registered company controlled by Offor in February 2002. The money was allegedly deposited into the account of a Belgian company that De Menezes owns.
At a news conference on April 23 -- the day after the Los Angeles Times sent De Menezes an e-mail asking about the allegation -- the president acknowledged accepting the money. He described it as a contribution to his political party and an allied party for parliamentary elections.
John Coleman, ERHC's sole employee in Houston, said the company had nothing to do with the payment.
Sao Tome and Nigeria have announced that they will take bids in October for exploration rights in nine oil fields they jointly own.
Multinational firms "are going to do back flips to get in," predicted Nugent, the ERHC shareholder.
"The IMF and everybody else dumped all over ERHC about Sao Tome, but they forget that we're the one who brung 'em to the dance," he said. "At the end of the day we're going to have the last laugh." |
