ERHC Energy Inc (ERHE)

[Gremlin9999]

This is an article on HDY that appeared on TheStreet.com. I have sent the author information on ERHC and suggested that he should take a look. You could link to the article and e-mail the author also.

http://www.thestreet.com/_yahoo/newsanalysis/businessnews/10358901.html?cm_ven=YAHOO&cm_cat=...

Business News
Hyperdynamics Makes Big Bet on African Oil
By Chuck Marvin
TheStreet.com Staff Reporter
5/30/2007 12:25 PM EDT


In West Africa, perhaps the most underexplored oil and gas region remaining in the world today, a tiny Texas exploration and production firm is poised to become a big player.

Hyperdynamics (HDY) , a Sugar Land, Texas, firm with an $80 million market cap, is preparing a drilling program for a 31,000 square-mile offshore mineral leasehold it controls through an agreement signed last year with the Republic of Guinea.

The area -- the size of South Carolina -- is larger than that of any other company in the region, including integrated giants such as Total (TOT) , Devon (DVN) and Petrobras (PZE) , according to IHS, an energy-information-gathering firm.

A large oil or gas discovery there could quickly propel Hyperdynamics from being a small unknown firm into the oil and gas big leagues. A litany of challenges, including a long history of political unrest in Guinea that has largely kept foreign investors and the big players away, makes the transition a difficult one. Still, the company is optimistic.

"So far we have found some extremely good-looking sections," says Bob Bearnth, a geophysicist who helped originate the Guinea project for Hyperdynamics. "The acreage in offshore Guinea clearly has the potential for world-class oil and gas reserves."

A Series of Agreements

In 2002, Hyperdynamics approached Guinea, located on Africa's northwest bend, with a proposition: The company would assume a dormant agreement between Guinea and another company to look for oil and gas off the country's coast. Hyperdynamics would invest the time and energy into finding and mapping possible hydrocarbon deposits, and in exchange Guinea agreed to grant the company the right to drill any wells if they were found.

Hyperdynamics walked away from those meetings with a risk-service contract granting it the operating rights to the large area offshore. Since then, the company has shot its first round of 2-D seismic, providing a glimpse of what lies beneath the ocean bed. In September 2006, it went back to the government of Guinea and negotiated a profit-sharing agreement that would allow it to exercise its drilling rights and guaranteed a large percentage of the revenues for the country if oil or gas is found there.

The company is now seeking partners with expertise in drilling shallow and deep-water oil and gas wells. It hopes to have partnership agreements signed by the end of the third quarter in 2007 and to begin drilling test wells sometime in 2008, says Hyperdynamics CEO Kent Watts.

A Built-in Market

There is no way to tell what kind of reserves might lie beneath Hyperdynamics' leasehold, since no test wells have been drilled yet. Other countries on Africa's northwest bend, like Mauritania and the Ivory Coast, have had large oil finds. Nigeria, lying further down the bend, is the world's eighth-largest oil producer, supplying roughly 2.3 million barrels per day to the global market.

Hyperdynamics' seismic shoots have uncovered multiple chimney-like formations with gas seeping from their tops, Bearnth says. It also uncovered structures that closely resemble productive formations off the northeast coast of Brazil. This is significant because South America and Africa were connected to each other 100 million years ago. Oil companies such as Royal Dutch Shell have made major discoveries off Brazil in areas that resemble Hyperdynamics' position in Guinea.

The Guinea play is unique compared with other oil and gas operations on Africa's northwest bend, because a market for natural gas already exists in the country. Guinea has 30% of the world's bauxite reserves, according to a Factiva report. Bauxite is the main ingredient in aluminum. Global mining companies such as Alcoa (AA) and BHP Billiton (BHP) have major mining operations there. These mines require enormous amounts of electricity to operate.

Rather than flaring the natural gas as other West African countries that are unable to monetize it do, Guinea would convert natural gas reserves -- if they're found -- into electricity to run its mines.

Guinea's Volatile History

Africa has been historically undependable for oil and gas companies because of the political turmoil that has frequently erupted there. The Republic of Guinea itself has had a volatile history at the hands of heavy-handed dictators since it gained its independence from France in 1958. This has made foreign investors nervous and has by-and-large kept oil companies out of Guinea.

Discord in Guinea has peaked since the beginning of this year. Popular protests erupted there in January after President Lansana Conte released two allies from prison who were charged with embezzling millions of public dollars. Guinea's government reacted harshly, imposing martial law and handing over policing powers to the military. Since the violence erupted, a large number of civilians have been killed.

Tension has also been mounting between Conte's administration and the Guinean military over unpaid wages to soldiers. The military recently gave Conte a list of demands, including the payment of wages and the promotion of soldiers, for the military to remain loyal to Conte.

Hyperdynamics has made great efforts to construct a secure berth in Guinea. It hired Famourou Kourouma, whose father is the former Guinea ambassador to the U.S., as a vice president of Guinea affairs. The company has produced television commercials in Guinea, marketing the benefits of future oil and gas production for its people. It established a nonprofit organization that provides medical aid for Guinea's citizens. It has also hosted community events and handed out soccer balls to children there.

Oil companies that end up operating in Guinea will likely be navigating through considerable political volatility. However, throughout Guinea's tumultuous history, the government has never backed out of a mining contract. This bodes well for Hyperdynamics.

"I think Hyperdynamics will get away with it," says Herman J. Cohen, former U.S. Assistant Secretary of State for Africa, who has consulted for the company during its negotiations with Guinea's government.

So Far, So Good

Guinea's National Assembly and its Ministry of Mines are currently reviewing a production-sharing agreement between the country and Hyperdynamics that delineates which entity will get what if oil or gas is found. Since an agreement is already in place, the Assembly's review shouldn't impact the company's right to operate in Guinea. However, if the Assembly does give its blessing, called "Project of Law" status, the exploration and production project will be placed on the fast track.

So far, Hyperdynamics' presentation to the Assembly has been going smoothly, according to Kourouma. "I believe that a vast majority of lawmakers in Guinea now understand the benefits of the 2006 profit sharing agreement and will ultimately support the passage of the 'Project of Law' designation," he said in a press release.

Hyperdynamics is a tiny fish entering a very big pond. It was recently trading at $1.70 a share, down from $2.95 in April 2006. The company isn't even big enough to be covered by any large research firms. Pechala Reports gave it a speculative buy ranking on May 14.

Expect Hyperdynamics' stock to move dramatically over the next 12 months as it announces who its drilling partners will be and as it begins to drill test-wells off of Guinea's coast.