ERHC Energy Inc (ERHE)

[RUBY1100]

AUG. 10 - Form 10-Q for ERHC ENERGY INC

http://biz.yahoo.com/e/090810/erhe.ob10-q.html

Quarterly Report

http://yahoo.brand.edgar-online.com/DisplayFiling.aspx?dcn=0001140361-09-018492

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company's unaudited consolidated financial statements (including the notes thereto) and Item 1A of Part II, "Risk Factors," included elsewhere in this report and the Company's audited consolidated financial statements and the notes thereto, Item 7, "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and Item 1A, "Risk Factors" included in the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 2008. The Company's historical results are not necessarily an indication of trends in operating results for any future period. References to "ERHC" or the "Company" mean ERHC Energy Inc., a Colorado corporation, and, unless expressly stated or the context otherwise requires, its wholly owned subsidiary.

Overview

ERHC reports as a development stage enterprise as there are currently no significant operations and no revenue has been generated from business activities. The Company was formed in 1986, as a Colorado corporation, and was engaged in a variety of businesses until 1996, when it began its current operations as an independent oil and gas company. The Company's goal is to maximize its value through exploration and exploitation of oil and gas reserves in the Gulf of Guinea offshore of central West Africa. The Company's current focus is to exploit its assets, which are rights to working interests in exploration acreage in the Joint Development Zone ("JDZ") between the Democratic Republic of Sao Tome and Principe ("DRSTP or "Tome") and the Federal Republic of Nigeria ("FRN or "Nigeria") and in the exclusive territorial waters of Sao Tome (the "Exclusive Economic Zone" or "EEZ"). ERHC will not directly carry out the exploration and production operations in the Joint Development Zone, but will rely on reputable technical operators, with whom the Company has entered into partnership relationships, such as Addax Petroleum Inc. and Sinopec Corporation to carry out those operations. The Company has formed relationships with these upstream oil and gas companies to assist the Company in exploiting its assets in the JDZ.

Current Business Operations

ERHC's operations are currently concentrated in the Gulf of Guinea, off the coast of central West Africa. ERHC believes this region has the possibility of significant oil and gas reserves and has worked to realize the value of the assets it has acquired in this region. The Company's current operations include those below, details of which can be found at the link http://www.erhc.com/en/cms/?169.

JDZ - ERHC has working interests in six of the nine Blocks in the JDZ, a 34,548 square kilometer area approximately 200 kilometers off the coastline of Nigeria and S?o Tom� & Principe that is adjacent to several large petroleum discovery areas. With regard to drilling in the JDZ, the Joint Development Authority (JDA), which was set up by the governments of Nigeria and S?o Tom� & Principe to administer the JDZ, has approved the budgets for drilling in JDZ Blocks 2, 3, and 4 in which ERHC has interests. The JDA also has approved well locations in the three Blocks. Development of ERHC's assets in the Joint Development Zone remains the principal focus of this company and management continues to concentrate time, energies and resources on accomplishing that objective.

During the quarter, significant progress occurred on the drilling timeline for the JDZ. Addax Petroleum, the operator (and ERHC's consortium partner) in Block 4, advised that deepwater Pathfinder drillship should arrive in August 2009 to enable Addax Petroleum to start exploration in the Deepwater Gulf of Guinea. ERHC holds a 19.5 percent working interest in Block 4. Also, Sinopec JDZ Block 2 Limited notified the Joint Development Authority of its intention to commence drilling in August 2009 in JDZ Block 2 where ERHC holds a 22 percent working interest. Substantial and positive developments towards exploration have also occurred in JDZ Block 3 in which ERHC holds 10 percent interest. ERHC expects significant announcements from the Operator of the block in due course.

EEZ - The government of S?o Tom� & Principe has awarded ERHC rights to participate in exploration and production activities in the EEZ, which encompasses an area of approximately 160,000 square kilometers. These rights were granted in a May 21, 2001 Memorandum of Agreement made between the DRSTP and the Company. The Company's rights in the EEZ expire on October 1, 2024 provided that if the company has a producing working interest in any of the EEZ Block(s) at October 1, 2024, the Company's rights extend in such Block(s), as long as the Block(s) remains in production.

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Operations in the JDZ

ERHC has interests in six of the nine Blocks in the JDZ, as follows:

� JDZ Block 2: 22.0% Working interest percentage

� JDZ Block 3: 10.0% Working interest percentage

� JDZ Block 4: 19.5% Working interest percentage

� JDZ Block 5: 15.0% Working interest percentage

� JDZ Block 6: 15.0% Working interest percentage

� JDZ Block 9: 20.0% Working interest percentage

The working interest represents ERHC's share of all the hydrocarbons production from the blocks and obligates ERHC to pay a corresponding percentage of the costs of drilling, production and operating the blocks. These costs in blocks 2, 3 and 4 are currently being carried by the operators, up to the production point, whereupon the operators will recover their costs from the production revenues.

In early 2008, Addax Petroleum, an experienced exploration and production company that has participation agreements with ERHC in JDZ Blocks 2, 3 and 4, and is the operator of JDZ Block 4 publicly disclosed seismic images and maps showcasing the prospectivity of its JDZ interests. This seismic was compiled by Geco-Prakla (now WesternGeco) in 1999 when WesternGeco shot a 2D seismic survey of approximately 5,900km covering the major part of the JDZ. Interpretation carried out by WesternGeco has led to the identification of 56 prospective structures within Blocks 1 to 9 in the JDZ, of which 17 were defined as prospects and 39 as leads. WesternGeco used reservoir parameters similar to those known from nearby fields in Nigeria and Equatorial Guinea. Combined recoverable reserves potential of the 17 prospects was estimated by WesternGeco. The scope of the WesternGeco report was to interpret and map seismic data, highlight prospectivity, and calculate volumetrics. . However whatever the interpretation given, seismic data and visualization techniques are not conclusive in determining if hydrocarbons are present in economically producible amounts.

In February 2009, an independent engineering firm Netherland Sewell and Associates, Inc. ("NSA") completed an independent assessment of the Company's unrisked and risked prospective resources in three of the six Joint Development Zone (JDZ) Blocks in which the Company has interests. The NSA report examines oil prospects in JDZ Blocks 2, 3 and 4 and the findings are presented in "Analysis of Risked and Unrisked Resources " on page 20 of this Quarterly Report.

The estimate of "recoverable reserves potential" based on WesternGeco's report, which interpreted and mapped seismic data, highlighted prospectivity and calculated volumetrics, was not based on any attempt to comply with the SEC definition of reserves and, accordingly the estimate of recoverable reserves potential is not presented. ERHC Energy has access to the data compiled by WesternGeco under the terms of a data use license with WesternGeco. .

Operations in JDZ Block 4

ERHC's consortium partner Addax Petroleum is the operator of JDZ Block 4. WesternGeco's interpretation of seismic data indicates significant recoverable reserves in JDZ Block 4. However whatever the interpretation, seismic data and visualization techniques are not conclusive in determining if hydrocarbons are present in economically producible amounts. Addax Petroleum has secured JDA approval to explore the Kina Prospect. Addax Petroleum previously announced that it signed an agreement with a subsidiary of Transocean Ltd. for the provision and operation of the Deepwater Pathfinder drillship to commence its exploration drilling campaign in the Deepwater Gulf of Guinea. As of July 27, 2009, Addax Petroleum had announced that it expects to take delivery of the Deepwater Pathfinder in August 2009 and intends to commence the consecutive drilling of four wells, the first of which is the Kina prospect in Block 4 of the JDZ. ERHC holds a 19.5 percent working interest in JDZ Block 4.

Operations in JDZ Block 3

Anadarko Petroleum is the operator of JDZ Block 3. WesternGeco's interpretation of seismic data indicates significant recoverable reserves in JDZ Block 3.
However whatever the interpretation, seismic data and visualization techniques are not conclusive in determining if hydrocarbons are present in economically producible amounts. On August 8, 2007, Anadarko presented the initial proposals for exploration well locations for the Block. The Joint Development Authority has approved drilling at the Lemba Prospect. ERHC holds a 10 percent working interest in JDZ Block 3



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Operations in JDZ Block 2

ERHC's consortium partner Sinopec is the operator in JDZ Block 2 in which ERHC holds a 22 percent working interest. WesternGeco's interpretation of seismic data indicates significant recoverable reserves in JDZ Block 2. However whatever the interpretation, seismic data and visualization techniques are not conclusive in determining if hydrocarbons are present in economically producible amounts. The JDA has approved drilling at the Tome Prospect in Block 2. In 2007, Addax and Sinopec jointly entered into an agreement with a subsidiary of Aban Offshore Limited for the provision of the deepwater drillship, the Aban Abraham, which had recently been refurbished and upgraded in Singapore. Continuing delays with the Aban Abraham caused Addax and Sinopec to seek �other deepwater drill ships. Sinopec intends to use the drillship Sedco 702 for drilling in JDZ Block
2. Sinopec JDZ Block 2 Limited has notified the JDA of its intent to commence drilling in August 2009 in JDZ Block 2. Sinopec believes that drillship Sedco 702 might be available for drilling in JDZ Block 2 around August 20, 2009.

Background of the JDZ

In the spring of 2001, the governments of S?o Tom� & Principe and Nigeria reached an agreement over a long-standing maritime border dispute. Under the terms of the agreement, the two established the Joint Development Zone to govern commercial activities within the disputed boundaries. The JDZ is administered by a Joint Development Authority (JDA) which oversees all future exploration and development activities in the JDZ. The remaining claimed waters of S?o Tom� & Principe are known as the Exclusive Economic Zone (EEZ). Revenues derived from the JDZ will be shared 60/40 between the governments of Nigeria and S?o Tom� & Principe, respectively.

Background of the EEZ

The S?o Tom� & Principe Exclusive Economic Zone ("EEZ") describes waters of S?o Tom� that encompasses an area of approximately 160,000 square km. It is measured from claimed archipelagic baselines - territorial sea: 12 nautical miles, exclusive economic zone: 200 nautical miles. It is the largest in the Gulf of Guinea. Ocean water depths around the two islands exceed 5,000 feet, depths that have only become feasible for oil production over the past few years; however, oil and gas are produced in the neighboring countries of Nigeria, Equatorial Guinea, Gabon and Congo. The African coast is less than 400 nautical miles offshore, which means the exclusive economic zones of the concerned countries overlap.

The government of S?o Tom� & Principe has awarded ERHC rights to participate in exploration and production activities in EEZ). ERHC's rights include the following:

� The right to receive up to two blocks of ERHC's choice; and

� The option to acquire up to a 15% paid working interest in another two blocks of ERHC's choice.

ERHC would be responsible for its proportionate share of exploration and exploitation costs in the EEZ blocks.



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Results of Operations

Three Months Ended June 30, 2009 Compared with Three Months Ended June 30, 2008

General and administrative expenses increased from $820,462 in the three months ended June 30, 2008 to $1,261,847 in the three months ended June 30, 2009. This increase came despite an ongoing effort to reduce operating expenses and was due primarily to an increase in legal expenses as the Company pressed its legal options in protecting its interests in JDZ Blocks 5 and 6. See "Legal Proceedings" in Item 1 of Part II of this report.

During the three months ended June 30, 2009, the Company had a net loss of $3,379,743 compared with a net loss of $604,173 for the three months ended June 30, 2008. The increase in loss was attributable to the increase in legal fees described above and the Company's decision to make a $2,117,158 provision for loss against deposits, totaling $5,292,897, in a financial institution that has been placed in receivership. Additionally, interest income decreased from $225,079 in the three months ended June 30, 2008 to $8,339 in the three months ended June 30, 2009, due to a decline in cash balance maintained by the Company, a general decline in interest rates and loss of interest income as the Company switched from an interest bearing but not guaranty deposits to non interest bearing but guaranty deposits accounts.



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Nine Months Ended June 30, 2009 Compared with Nine Months Ended June 30, 2008

General and administrative expenses decreased from $2,994,433 in the nine months ended June 30, 2008 to $2,889,509 in the nine months ended June 30, 2009. During the nine months ended June 30, 2009, the Company had a net loss of $4,613,383 compared with a net loss of $2,038,029 for the nine months ended June 30, 2008. The increase in loss was attributable to the Company's decision to make a $2,117,158 provision for loss against deposits, totaling $5,292,897, in a financial institution that has been placed in receivership. Additionally, interest income decreased from $979,904 in the nine months ended June 30, 2008 to $420,514 in the nine months ended June 30, 2009, due to a decline in cash balance maintained by the Company, a general decline in interest rates and loss of interest income as the Company switched from an interest bearing but not guaranty deposits to non interest bearing but guaranty deposits accounts.

Liquidity and Capital Resources

As of June 30, 2009, the Company had $23,597,089 in cash and cash equivalents and short-term investments and positive working capital of $20,407,317. Management believes that this cash position should be sufficient to support the Company's working capital requirements for more than 12 months.

Off-Balance Sheet Arrangements

At June 30, 2009, the Company had no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition or results of operations.

Debt Financing Arrangements

At June 30, 2009, the Company had short-term debt of $33,513 bearing interest at 5.5% per year payable to an individual. The Company had other current liabilities of $5,750,376 including related party liabilities as follows:
$195,175 in compensation due to certain officers and key employees, and $49,063 owed to the Company's board of directors for directors' fees. Included in current liabilities is also a $4,803,750 liability to Feltang International Inc. that will be satisfied upon issuance of 5,250,000 shares of common stock.



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Analysis of Risked and Unrisked Resources

In February 2009, an independent engineering firm Netherland Sewell and Associates, Inc. completed an independent assessment of the Company's unrisked and risked prospective resources in three of the six Joint Development Zone (JDZ) Blocks in which we have interests. The report examines oil prospects in JDZ Blocks 2, 3 and 4 as of December 31, 2008. Following is a summary of the findings.


UNRISKED PROSPECTIVE RESOURCES
Low Estimate (P90) Best Estimate (P50) High Estimate (P10)
Oil Gas Oil Gas Oil Gas
Prospect (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
JDZ 2 40,577 45,742 77,007 93,948 119,476 150,706
JDZ 3 18,045 21,092 27,343 32,953 37,877 46,378
JDZ 4 150,990 157,133 231,667 245,308 319,434 342,658
Total(1) 209,612 223,967 336,017 372,209 476,787 539,742





RISKED PROSPECTIVE RESOURCES
Low Estimate (P90) Best Estimate (P50) High Estimate (P10)
Oil Gas Oil Gas Oil Gas
Prospect (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
JDZ 2 19,492 22,334 38,334 47,908 60,320 78,150
JDZ 3 5,807 6,817 8,751 10,543 12,094 14,771
JDZ 4 58,666 56,244 88,437 86,282 120,297 118,961
Total(1) 83,965 85,395 135,522 144,733 192,711 211,882




(1)Totals are the arithmetic sum of multiple probability distributions. Totals may not add because of rounding.

Below is a brief glossary of what the terms mean:

Oil volumes are expressed in thousands of barrels (MBBL).

Gas volumes are expressed in millions of cubic feet (MMCF).

Prospective resources are those quantities of petroleum estimated as of a given date, to be potentially recoverable from undiscovered accumulations. This report examines ERHC's prospective resources as of December 31, 2008.

Unrisked prospective resources are the volumes estimated to be recoverable in the case of a successful petroleum discovery being made.

Risked prospective resources are calculated by multiplying the unrisked resources by the geological chance of success to account for the risk of drilling an unsuccessful exploration well.

P90 - The quantity for which there is a 90 percent probability that the quantities actually recovered will equal or exceed the low estimate.

P50 - The quantity for which there is a 50 percent probability that the quantities actually recovered will equal or exceed the best estimate.

P10 - The quantity for which there is a 10 percent probability that the quantities actually recovered will equal or exceed the high estimate.