Equator Exploration - W. African Oil / Gas Giant in the Making (moderated)

Part 2 – Asian Fans and Drill Ships

In Part I (The Flogging of ERHC), I postulated that: (a) SEO is forced to divest parts of his ERHC majority control and stockholding, consequent to the Starquest/OPL 291 conundrum and the ensuing EFCC investigation, unfolding in times of gross political uncertainty; (b) he acts to buttresses his weakened position by (eventually) aligning himself with the best option available, namely the (buy-in) proposals from MPE.

Since then, three important new” facts” have emerged;

(1) the signing of a Sino-Indian JV MOU, with specific references to E&P activities in West Africa and the JDZ,
(2) encouraging drill ship announcements from Anadarko and ONGC respectively and finally,
(3) the ERHC press statement announcing the appointment of a senior oil engineer (Mr. James Ledbetter) from Saudi Aramco to be the technical head of ERHC, along with a concurrent notice declaring a shift in the company’s hitherto strategic focus beyond deepwater JDZ activity towards acquisition and management of new low-to-medium risk prospects, a process which he (Ledbetter) will lead.

How do these factually concrete new elements impact the core postulates?

First, the SNP/ONGC MOU; while impressive in its global aspirations, it is not in itself unique. ONGC has already formed a JV with the other major Chinese oil company, the China National Petroleum Corporation (CNPC), where late last year they bought the Syrian assets of Petro-Canada for about 485m Euros. Furthermore, the MOU/JV move is somewhat less awesome when put in concrete form within the greater Gulf of Guinea, apparently its first testing ground (assuming the non-binding MOU, one year in gestation, metamorphoses into a real JV).

Of course, teaming the cash-rich JDZ Block 2 operator SNP with deep-water experienced (and temporary Belford Dolphin contract holder) ONGC brings immediate benefits, along with control of 41.7 % of that Block (for starters…..with another 9% allied to the team from EEL, if the latter so commits). So why would SNP/ONGC want more there, especially given the explicit Chinese strategy of low-keying ownership or preferring it to be shared with others in all major overseas fields?

Moreover, there are other appealing assets where operatorship control is possible and that can be jointly pursued, starting with SNP’s interest in Block 6 as expressed in the second (May 05) JDZ Licensing Round (unless that Sinopec entity was a bogus one, as Meridian had claimed in a posting last year).

Then, there is the whole raft of STP/EEZ Blocks allocated 100% each to EEL and ERHC. These are not only considered prolific hydrocarbon territories (especially natural gas) but also offer China (and Sao Tome) a channel, through SNP, to normalize relations with each other (with STP dropping Taiwan), something of an article of faith in Beijing diplomacy. EEL has the advantage here, due to its rights to the two best EEZ blocks, to its prior relationship with parts of the STP leadership, as well as with ONGC in Block 2 and also due to its first possession of recently completed 3D seismic surveys of the EEZ. A free carry and some cash to EEL in exchange for opertorship and majority rights (the ERHC/Addax paradigm) would easily, and inexpensively, settle matters.

Signing of STP/EEZ PSAs has again been delayed until the end of 2007, which gives the potential Sino-Indian JV ample preparation time. More pressing however, are the forthcoming 2007 Nigeria bidding rounds for the 60+ oil and gas blocks to be auctioned. Acreage of strong appeal to both partners, (ONGC has just won two blocks in the May 2006 auction) as they would now be better placed and financed to bid successfully (and bring immense geo-political leverage to Nigeria as an add-on).

Conceivably SNP and ONGC acting in unison are big enough to take out even the most formidable opponent in the entire Gulf of Guinea. They could fan out everywhere. But it is unlikely that they would do so. They don’t need to as explained above, and they have other fish to fry, very big ones closer to home, especially in Iran and Central Asia.

Accordingly, for the foreseeable future I would argue that their sights are on the more modest goals of JDZ Blks 2(&6) consolidation and exploration/production, joint venturing with EEL in EEZ/Blks 1&2 and winning bids in X number of bids in the Nigerian 2007 round of offshore blocks.
Hardly “piddley” JV endeavours. But of no immediate relevance for either SEO’s predicament or, the specific ERHC/SEO-MPE discussions. With one possible – and very important - exception, as will be explained later on.

Secondly, as per the drill ship announcements:

The Anadarko announcement re the arrival of a rig in Block 3, probably in Q4/07, a possible appearance of the Belford Dolphin in Blk 2 sometime before or after the Kosmos contract, also in W African waters, in addition to the earlier CVX announcement re further Obo drilling by (again in late 07,) is certainly welcome news for all parties in the JDZ, most certainly for ERHC.
At the same time, these notices strengthen SEO’s hand somewhat in the (ongoing) price haggling over ERHC, as actual drilling is now becoming imminent. And they narrow somewhat the window of opportunity for MPE to close a deal well in advance of such JDZ drilling.

Clearly, no official drilling scheduale has been announced by the JDA to date, one which would include activity in the all-important Blk 4. Such notification would formally delineate all the above negotiations with a specific time frame. Nevertheless, although such a scheduale may have been submitted and approved at the recent JDZ meeting, and hence already be common knowledge to all concerned (i.e. SEO & MPE), it remains, for the intents and purposes of this discussion, a mere formality with little impact. The important thing, namely knowledge of progress to date in rig procurement and subsequent drill planning, has already been amply clarified to both (except perhaps for Blk 4).