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The Nation

Sinking Its Hopes Into a Tiny Nation

Obscure Texas oil firm, amid claims of bribery, secures a deal with poor Sao Tome and Principe.

May 24, 2003|Ken Silverstein | Times Staff Writer

HOUSTON — Environmental Remediation Holding Corp. has one full-time employee at its headquarters here.

It hasn't reported a penny of revenue for four years and has piled up more than $30 million in losses. Its stock price hovers around 17 cents a share.

Yet thanks to its sole asset -- a contract that gives it a major stake in a tiny West African nation's oil fields -- the obscure Texas oil company appears to be on the verge of a stunning turnaround.

ERHC secured its oil rights from Sao Tome and Principe, an island nation so poor that it supplements its budget by issuing commemorative stamps of Marilyn Monroe, the Beatles and other celebrities.

The company's oil contract, made final last month, gives it rights to two offshore fields in Sao Tome's territorial waters and a significant share in deposits in an area jointly controlled by Sao Tome and Nigeria.

About 4 billion barrels of crude are believed to lie beneath those waters. Without a drilling rig to its name, ERHC could reap hundreds of millions of dollars from its holdings. The company has not revealed its plans, but analysts predict it will sell its interest to one of the industry giants.

That a small energy speculator could get such a lucrative foothold in Sao Tome has mystified experts, who suspect the company benefited from the country's inexperience in the oil business.

Bill Brumbaugh, a Houston energy consultant who advised Sao Tome on its contract with ERHC, says the deal amounts to "a raid on Sao Tome's future national treasury."

The contract has outraged internal opposition groups, which accuse the government of taking bribes. Last month, Sao Tome's president, Fradique Bandeira Melo de Menezes, admitted secretly receiving $100,000 from ERHC's chairman. De Menezes insisted the money was a campaign contribution.

ERHC officials deny bribing the president. They acknowledge winning highly favorable terms and offer no apologies. They say they've spent $12 million so far on the Sao Tome venture, about half in payment to the national treasury and the rest to chart the country's offshore waters and otherwise pave the way for exploration by multinational energy firms.

The original agreement between the company and Sao Tome was signed in 1997. Since then, it has twice been renegotiated, and successive governments have threatened to kill it. Yet the company emerged last month with some of the most generous terms ever bestowed on a foreign oil firm. The beneficiaries include a Nigerian businessman, who owns nearly half the shares, and a handful of Texas oilmen.

"ERHC is in the catbird seat," says Phil Nugent, a Houston-based oil and gas consultant and a major shareholder in the company. "We're going to get our pound of flesh and I think we're due it."

West African Oil Rush

ERHC's dealings with Sao Tome reflect a rush for oil riches in West Africa. The region provides 15% of American oil imports, and the figure is expected to grow to 25% within a decade as the U.S. government seeks to reduce energy reliance on the Middle East.

Major oil producers such as Nigeria and Angola have highly trained energy experts and lawyers and can negotiate on equal terms with big oil companies.

But newcomers with unproven reserves, such as Sao Tome, frequently turn to small European or U.S. consulting firms, which conduct or arrange geological surveys, help write foreign investment laws and try to interest big oil companies in developing reserves. The consulting firms typically collect a flat fee, or make their profit by selling their geological surveys to the big companies.

ERHC, instead, negotiated a stake in Sao Tome's oil fields, including a 14% share of the most promising ones. If the country's reserves weren't as big as believed, or couldn't be exploited, the company would be out its relatively small outlay. On the other hand, if Sao Tome's oil potential was borne out, the company stood to make a vast return.

Andrew Latham, a West Africa expert for Wood Mackenzie, an energy consulting firm in Edinburgh, Scotland, says the Sao Tome-ERHC agreement is far out of line with industry standards.

"There are plenty of examples where a small firm will get in early and help promote a country's oil acreage. Their rewards are relatively minor " Latham said. "I've never seen a company get a stake like ERHC obtained in Sao Tome."

Africa's smallest nation, Sao Tome is composed of two islands with a combined territory of 372 square miles -- about one-third the size of Rhode Island -- and a population of 170,000. The country straddles the equator and is located west of Gabon in the Gulf of Guinea.

Sao Tome gained independence from Portugal in 1975 and, unlike most African nations, is a parliamentary democracy with little history of military involvement in politics. Per capita income is a mere $300, and Sao Tome imports all its fuel as well as most consumer goods and food.

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