ERHC Energy Inc (ERHE)

[spp119]

Regarding Eremor,

As promised, following some DD last night, here is a brief sketch on the possible acquisition by ERHE of some working interest in the Eremor Marginal Field.

1) Before talking about the actual state of play on the field itself, the point of departure would best be an insight into what the term "Marginal Field" means. Because important operational, financial and ownership considerations flow from this concept which governed/s the distribution of a very large number of Nigerian oil/gas fields. And it is a central constituent of the (mild) resource nationalism characterizing the new petroleum policy of the current Yar'Adua administration.

2) Very briefly, for a long time there were a number of Nigerian oil/gas blocks in which major, foreign independent oil companies(IOC) had discovered hydrocarbons but left undeveloped. To rectify this situation but also to encourage greater Nigerian participation in the upstream sector, the former Obasajno administration,based on some antecedent decisions of former governments, persuaded the IOCs to relinquish their holdings on these blocks and in 2003, parceled out 24 such fields to a variety of indigenous firms.

3) There were strings attached to these allocated fields.

Their new owners were by no means allowed to subsequently transfer ownership to foreigners. Majority ownership was to always remain in Nigerian hands and failure to comply meant, and still means, immediate forfeiture.

Foreign participation while allowed, was limited to technical and financial co-operation agreements in which they could receive no more than 50% of profit oil. It is for this reason that Marginal Fields do not offer foreign firms the security of a PSC, but are limited to Financial/Techical Services Agreements (called FSAs) which in redress in case of partner disagreements is heavily skewed, by statutes in law,in favour of the indigenous firm.

There are however some strong inducements, designed primarily to induce local Nigerian participation and uptake, but which also encourages foreign involvement. All Marginal Field investment and production benefits from an extremely favourable tax and royalties regime, profit oil encumbered by no royalty payments and having the allowance of a greatly reduced (by almost 60% I believe) tax burden.

4) Indeed, some 24 such Marginal Fields were awarded in Febrary 2003 under the so called "Federal Government Marginal Field Programme", to local firms and their partners. Amongst these companies was Excel E&P (set up and owned by a rtd. rear admiral, Allison Maduekwe), beneficiary given to operate the Eremor field.

By the end of 2008, only five of these indigenous firms were either producing or on the verge of doing so. This lack of progress was causing great concern to government and so, in early 2009, the Yar’Adua administration prepared to issue an auction calling for bids later in 2009, but for a now greatly increased number (nearly 60) of marginal fields. And it warned that local companies who had hitherto inadequately developed their existing fields would have them revoked.

However, as things now stand, this second Marginal Fields auction process has run into considerable confusion. The relevant Ministry (DPR) which is responsible for peparing the major new Petroleum legislation now before the Nigerian Parliament, issued a list of 150 fields to be included in the round, a list (based on IOC to quickly give up undeveloped acreage),directly flowing from items in that draft legislation. Needless to say there is opposition from IOCs who contest the actual number of undeveloped field and much political murkiness to the whole affair by aspirants to some of the blocks on posssible offer.

(The main sources for this short outline on marginal fields are ;

a) http://www.xomba.com/nigeria_marginal_field_review_bid_round_2009

b) http://investorshub.advfn.com/boards/read_msg.aspx?message_id=43043284

c) http://www.ngrguardiannews.com/business/article02//indexn2_html?pdate=030509&ptitle=Oil:%20Marginal%20Field%20Operators%20In%20Dire%20Straits?.

5) The Eremor field was awarded in 2003, as noted above, to Excel E&P. Its technical/financial partner was Mart Resources (owned by Wade Cherywako, a figure familiar to ERHE as a founder of EEL and one very close to members of the STP political elite). Mart became very active in the Marginal Fields programme, signing FSAs with local companies on three other (larger)fields as well (Umusadege,Ke & Qua Ibo).

But by 2007, the partnership had broken down and Excel entered into a new FSA to develop its Eremor holding with Afren. That FSA allowed Afren a 90% effective interest prior to payback (cost oil) and 50% working interest (profit oil) thereafter.

6) Indeed Afren committing to bringing the (4) Eremor field wells to full production by 2010. But other than re-submitting for government approval a revised FDP in place of the original (Mart inspired)one, based on a reworked needs definitions per a link up with Shell transport infrastructure about 12 km away, it seems to have done very little else....

And while the FSA seems to have been in effect until the middle of this year, the company's Nov 4th Investors Presentation, for the first time, makes no mention of an Eremor holding at all.
And querries have led absolutely nowhere!

(The most complete and up to date account of the Eremor field (complete with a geological map, NSAI approved reserves and resources,FDP outline, etc) is found on pg 41 of the Afren UBS Presentation of March 09. The link to that presentation has been withdrawn from the Afren site and in any case is no longer operative.
However, I fortunately did save a copy of the PDF and will ask YankeeMike and Tryot to again assist me in rendering it to this board in accessible Word format. Just the recent November presentation is available).

a) http://www.afren.com:80/uploads/UBSInvestorPresentationFinal260309(1).pdf (inoperative)

b) http://www.afren.com/investor_relations/presentations/ (Nov Presentation)


7) So does all this War & Peace length outline (lol) offer some clarity to the discussion on moves and motives concerning the Eremor Field MOU. I believe it does in three respects.

First, it is clear that although the MOU is with Excel, that does not mean it is geared towards the Excel precentages. Excel remains the owner of the field and cannot go below the 50% profit oil threshold.

Second and as a consequence to the above, the MOU, id executed into an Agreement consists in effect of an ERHE farm-in into the Afren FSA. What is not clear is whether it is a farm in for the totality of the Afren holding or only a part thereof.

Third, it is a move which no doubt has caught all peeps here by surprise. I will not dwell into what the possible consequences for ERHE will be if it is part of deeper strategy of turning ERHE from the rights holding trust into a small producing oil company (albeit one with very large offshore exploration holdings)...or just simply a ploy in the context of an interplay of aspirants in the imminent Marginal Fields auction, for purposes unknown at present.

Yet the timing of the move, if it is reflective of a strategic corporate shift is impeccable.

The recent global economic maelstrom is fading from view, the Delta is experiencing signs of a tenuous pacification of the armed conflict, the Nigerian government is preparing for a major overhaul of the petroleum sector,(of which the Marginal Fields is but one aspect) for which it seeks support from the Nigerian business world, especially for it to be proactive in upstream activity.

ERHE seems to be on the verge of benefitting from some major new discoveries on the JDZ and possibly final concetisation of its EEZ rights into tangible, specific Blocks.

Both of which imply ease and ability to request and recieve any mezzanine financial support it may require to meet the needs of the Eremor FDP and begin monetizing the asset.

Indeed, a possible Eremor farm-in could be just the beginning.....

spp119