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Thursday, 05/26/2005 9:27:58 AM

Thursday, May 26, 2005 9:27:58 AM

Background article on JDZ, added to ibox

DAILY INDEPENDANT, Tuesday May 24th, 2005

The long wait for JDZ deal

By Bassey Udo

Release of results of the 2004 Licensing Round of the Nigeria-Sao Tome and Principe Joint Development Zone (JDZ) originally scheduled for December 31, 2004 has been postponed a couple of times for inexplicable reasons.

In this analysis, Energy Editor, Bassey Udo, contends that ExxonMobil’s decision to reserve its rights in two of the five blocks on offer in the zone, the recent sack of the Sao Tomean Special Adviser on Petroleum and Energy, Patrice Traovoda, as well as last week’s resignation of the country’s Minister of Petroleum, Arlindo de Ceita Cavalho, over allegations of involvement in shady deals that compromised the bid process appear to fuel the perception in some quarters of a waning interest and credibility crisis of the exercise among investors.

The eighth meeting of the Joint Ministerial Council (JMC) held in Abuja, October 28 and 29, 2004, captured the mood and enthusiasm of the two partner countries – Nigeria and Sao Tome and Principe – towards the early development of the JDZ.

Apart from the announcement of the official closure of the 2003 Licensing Round, the JMC directed the Joint Development Authority (JDA) to make necessary arrangements to conduct another bidding round with a view to awarding additional (oil) blocks within two months. This will “enable the generation of revenue that will assist the State parties in fulfilling the aspirations of their people”.

Abubakar Tanko, Nigeria’s Minister of State for Foreign Affairs in his opening remark spoke the minds of the governments of the two on the need to award new oil blocks in the zone in addition to the premier Block-1 to help “generate the desired level of activity and revenue”. Tanko, who described the meeting as “very crucial”, listed the review of negotiations of the Production Sharing Contract (PSC) for Block-1 and opening of discussions on the process for award of additional oil blocks as key items on the day’s agenda.

Timetable and guidelines

A timetable and guidelines issued at the end of the meeting for the conduct of a new licensing round indicated that five new oil blocks (2, 3, 4, 5 and 6) would be on offer between November 15 and December 15.

Prospective investors were requested to submit their bids within the period, at the end of which bids were to be officially opened, while results and announcement of winners of the oil blocks were to hold latest December 31, 2004.

The stakes were predictably high and the frenzy among prospective investors expectedly fierce, apparently as a result of the huge success recorded in the maiden round in which Chevron Corporation emerged operator of Block-1 with a whooping $123 million offer.

At the official bids opening, December 15, 2004, about N60 billion was staked from 26 bids submitted by 22 interested investors.

If things were going according to initial schedule, the results of the bids could have been released and winners emerge by December 31, 2004. But, that was not to be.

The official explanation was that there were a few issues that needed to be sorted out in respect of the Joint Operating Agreement (JOA) with Chevron Corporation and its partners in Block-1, to clear the way for the payment of the signature bonus.

Besides, it was gathered that the delay, though not originally intended, would afford the JDA sufficient time to carry out the technical and commercial evaluation of the bids before final announcement of winners.

ExxonMobil, ERHC rights

When the bids evaluation finally began, one issue that appeared to have proved a hard knot to untie was how to get ExxonMobil to agree to participate in the development of some of the oil blocks without engendering the credibility of the guidelines regulating the bid process.

ExxonMobil and Environmental Remediation Holding Corporation (ERHC) are two oil companies having pre-emptive option rights in the five oil blocks on offer by virtue of their existence in the Sao Tomean territorial waters in years predating the 2001 treaty establishing the JDZ.

ExxonMobil has 25 per cent rights in two of the five oil blocks, while ERHC, an American-based company in which a Nigerian oil firm, Chrome Energy, has major stakes, has rights ranging between 15 to 30 per cent in all five blocks.

The difference was that whereas ERHC participated in the bidding round and submitted bids for some of oil blocks, ExxonMobil did not. Yet, accommodation must be found for its pre-emptive rights by being offered equity as a joint venture partner in the event of its not willing to farm-out.

During the evaluation of the bids, ERHC had validated its pre-emptive option rights.

But, the JMC, at the end of its 9th meeting of April 26 and 27, 2005 in Abuja, issued a directive for ExxonMobil to move within 30 days to exercise its rights in two of the five blocks to pave the way for the release of the final results and announcement of the winners of the operational licenses for the five oil blocks.

After weeks of consultations and negotiations with JDA officials during which all the parties were afforded the opportunity to review the 26 bids to accommodate all interests, ExxonMobil, contrary to wide expectations, opted to reserve its rights in the two oil blocks, citing business reasons.

"We confirm that ExxonMobil has elected not to exercise its rights to participate in additional blocks that may be awarded pursuant to the current tender round in the Joint Development Zone of Nigeria and Sao Tome and Principe”, the company said in a terse statement in Lagos.

Though the company confirmed its interest to retain its 40 per cent stake it already holds in the zone’s premier Block –1 through its subsidiary, Esso Exploration and Production Nigeria-São Tomé "One" Limited, the real reason for its decision not to exercise its rights was left for conjecture, signaling the turning point in the bid process.

Why ExxonMobil reserve its rights

Sources close to the American oil firm alleged that ExxonMobil may have taken a strategic decision to protect its business interest by opting out when it became obvious that it was not going to win the argument and get the JDA to accept its proposal.

Though ExxonMobil did not submit bids for any of the five oil blocks on offer, it was gathered that throughout the month-long negotiations and consultations with the JDA, it was pushing a case for it to be granted the operatorship of the two oil blocks it was expected to exercise 25 per cent rights considering its capacity and clout in the industry, in terms of experience and technical know-how in deepwater operations.

It was gathered that the company never wanted to play a second fiddle to ERHC, which though known to have spearheaded oil and gas exploration and production activities in the Sao Tomean territorial waters since 1986, may not have been seen by industry players as possessing the kind of expertise and experience required to drive a highly challenging and capital intensive process of producing hydrocarbon in a risky terrain of about 3,000 feet on deep offshore waters, an environment that requires enormous technological and capital investments to succeed. Not even ERHC’s claim to have struck a partnership deal with some American oil firms, Pioneer Natural Resources, Devon Energy and Noble Energy could sway the argument in its favour.

“It would have been a marriage of strange bedfellows if ExxonMobil, the world's largest publicly traded oil and gas company, had accepted a position that would have seen it working in any capacity with ERHC other than as the operator of the concessions”, an industry analyst observed.

The situation reportedly triggered sharp disagreements among top officials of the Nigerian and Sao Tomean authorities, particularly what terms should be offered prospective participants in the development of the oil blocks.

Though some of the officials were said to have openly opposed any attempt to give any concession to ExxonMobil’s demand, apparently because of its obvious implications on the stipulated guidelines for the bid process, others were merely protecting their vested interests in the acreages.

A top ExxonMobil official, however, denied that its decision to reserve its right had anything to do with any rift or aversion for any company, saying: “Our decision not to exercise our right or not was informed by purely business reasons. Maybe after the assessment of the viability of the blocks, the company considered that going ahead was not in its strict business interest. It has nothing to do with anybody.”

Whether the parties involved agree or not, it would seem difficult not to appreciate the negative impact ExxonMobil’s decision not to exercise its rights would have on the initial enthusiasm and interest by investors in the development of the JDZ acreages.

JDA and reduced signature bonuses

Even the JDA appears to appreciate the reality of the waning interest among investors as it had to perk the signature bonuses for each of the five oil blocks at levels lower than the base offers during the bids to encourage participants, at least to still realise set objectives.

Whereas the highest offers as signature bonuses were $135 million, $41 million, $175 million, $37 million and $45 million for Blocks 2, 3, 4, 5 and 6, respectively, the JDA in its preliminary results to be ratified by the JMC, according to its Chairman, Carlos Gomes, perked the figures at $71 million, $40 million, $90 million, $37 million and $45 million, correspondingly.

JDZ and the Rumble in Sao Tome

Apparently to reassure prospective investors of stakeholders’ commitment to transparency and openness in JDZ transactions, Sao Tomean President, Fradique De Menezes, fired his Special Adviser on Petroleum and Energy, Patrice Traovoda, son of the country’s former President, Miguel Traovoda, one of the founding fathers of the JDZ.

Menezes accused Traovoda of ‘gross misconduct’ following allegations of his involvement in dealings that appeared to have compromised the transparency of the 2004 bid process.

According to Menezes, Traovoda was discovered to have interests in some companies that participated in the licensing round, adding that the former adviser was known to have been involved in illegal activities that tantamount to the corruption of the bid process having been linked with allegations of “promises to assist some companies that participated in the 2004 bid round.’’

Last week, apparently in sympathy with Traovoda, the country’s Minister of Petroleum Resources, Arlindo de Ceita Cavalho, resigned in controversial circumstances.

The two top Sao Tomean official, who were also members of JMC, played prominent roles in various negotiations by JDA and investors in the JDZ. The exit of the two officials will obviously complicate the problems, causing the delay in the completion of the bid process. How the problems are resolved will determine how long the parties have to wait for the realisation of the objectives the JDZ was established.

http://www.independentng.com/energy/enmay240506.htm

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