Sao Tome Prepares for an Oil Boom The results of drilling in waters next to the West African island are expected soon. By Dino Mahtani, Financial Times April 15, 2006
SAO TOME AND PRINCIPE — On the tarmac of a sleepy airport on a tiny tropical West African island, a private jet unloads boxes of champagne, an early sign that preparations are underway for an oil boom.
The impoverished and aid-dependent archipelago state of Sao Tome and Principe may be home to only 160,000 people — whose main exports include tourism, cocoa and phone-sex lines — but it also sits on one of the world's oil exploration hotspots.
ADVERTISEMENT With President Bush keen to diversify U.S. energy sources away from the Middle East, Sao Tome could become a big factor in U.S. energy policy in the Gulf of Guinea, which already accounts for about 15% of U.S. imports.
Chevron Corp., the oil giant based in San Ramon, Calif., is expected to soon announce the results of the first oil well drilled in a deep-water development zone bringing Sao Tome together with neighboring Nigeria, Africa's biggest oil producer.
Chevron said Tuesday that it had completed drilling the well — begun in January in partnership with Exxon Mobil Corp. — and was studying samples extracted. The company declined to comment on reports that it had made a significant discovery at the site.
Once a disputed territory, the zone was born from a negotiated settlement in 2001. Profits are split, with 60% going to Nigeria and 40% to Sao Tome.
With three more contracts signed in March to develop additional acreage in the zone, Sao Tome's politicians will be eyeing the $49-million initial payment by Chevron and its consortium last year and the tens of millions more expected from the new contracts. Sao Tome's gross national product was an estimated $70.5 million last year.
Although some members of the Sao Tomean political elite are priming themselves for a champagne uncorking frenzy, all is not well. Considerable damage has been done to the oil development zone's credibility because of infighting between lobbies representing different political and business interests on the island, in Nigeria and elsewhere.
Those involved in the two oil-zone licensing rounds in 2003 and 2004 say the haggling could have delayed oil production by several years.
Late last year, Sao Tome's attorney general released an unsolicited report saying the latest licensing round was "subject to serious procedural deficiencies and political manipulation." The report also alleged that Sao Tome had been pressured by Nigeria to sign off on licensing awards favoring certain business interests. This prompted a fierce denial by Nigeria.
Over the last few months, three U.S. companies that won licenses under the 2004 round to operate oil blocks in the oil zone withdrew from the process after delays over signing contracts. They were replaced by China's Sinopec Group and Addax Petroleum Corp., a Canadian-listed company with strong ties to Nigeria. The new operators have less experience in offshore drilling than the U.S. companies.
Complicating the relationship between Nigeria and Sao Tome is the role of Environmental Remediation Holding Corp., a small and inexperienced Houston-based oil company.
In exchange for $5 million in 1997, Environmental Remediation was awarded unusually favorable terms, by industry standards, in Sao Tome. Its rights were renegotiated by successive Sao Tomean governments, but the company still took shares in five of six oil blocks awarded so far in the oil zone and won exemptions on paying initial signature fees to Sao Tome.
Emeka Offor, a Nigerian businessman close to Olusegun Obasanjo, the Nigerian president, acquired control of Environmental Remediation when Sao Tome was in arbitration with the company, just before Sao Tome and Nigeria resolved their territorial dispute to create the oil zone.
Irving, Texas-based Exxon Mobil, the world's biggest oil company, also acquired favorable rights in Sao Tome in the late 1990s but did not take them in blocks where Environmental Remediation would be present. Pro-Exxon lobbies have subsequently tried to discredit the process.
Political infighting between lobbies representing oil companies may provide the biggest threat to the oil-development zone.
"The disruptive influence is the inherited problem Sao Tome has with third parties," said Hassan Tukur, a senior Nigerian foreign ministry official and a former director of the oil zone.
Even seasoned politicians admit the political system is breaking down, partly through the effect of inflows of money into different campaigns reflecting divided loyalties on the island. Sao Tome has seen six prime ministers and an unsuccessful coup since President Fradique de Menezes took office in 2001.
A law designed to limit government spending from oil receipts could be the only brake on the political system being completely dominated by cash, which would hobble the ability of any government to function equitably.
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