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

Part 3 - Arab money and the Big Bang

The third new element, the press announcement re Ledbetter’s appointment and the diversification into low risk oil properties - contrary to the minimal implications of the other two on the dual postulates of Part 1 - is pregnant with effects and consequences.

This appointment is anything but coincidental; and to understand how and why, one must begin with its second part, i.e. SEO declaring fast track revenue generation by pursuing new low risk prospects.

Why would SEO want to do so now, when JDZ rights are not fully perfected {Blk 5,6 (&9)}, when the STP/EEZ affairs are in a state of suspended animation and, when he has already followed this course (low-to-medium risk acquisition) independently of ERHC, through Starcrest?

And where would he look for properties, if not first and foremost in Niger Delta space, the area in which he would know where the best available such assets are located?

On paper, the business rationale is impeccable. Also, low-to-medium risk Nigerian oil properties are, if not in abundance, at least not scarce, if by risk we mean technical exploitation risk.

In reality however, such properties are at the bottom of the global league of desirable oil assets, due to kidnap and extortion gangs, increasingly separatist MEND militia attacks, rampant illegal bunkering sanctioned by most of the local officialdom, including those in uniform, etc. The deteriorating security risk, in other words, is an almost insurmountable barrier to entry, with those Western companies already there evacuating all non essential personnel and families. To enter now is madness.

So, with the possible exception that a low risk property may somehow be found away from this quagmire of violence and pillage, one that can also be fast-tracked to early production (which excludes almost all offshore fields), why go through with such insanity?

The answer lies in the repercussions arising from Starcrest’s “usurpation” of OML 291. First in engendering the fury of senior politicians in the very core of President Olusegun Obasanjo’s inner sanctum, which SEO, by reasons of background and education is not privy to, being in fact mostly affiliated with the second tier of the ruling elite; second, in getting the EFCC breathing down SEO’s back.

The “greenhorn” SEO (as a very perceptive IHUB poster recently described him) is learning his lesson. As stated in Part 1, in order to future-proof his ERHC assets, given loss of the top political backing, he is seeking to buttress the company with the protection of a foreign buy-in partner.

This new pursuit of “low-to-medium risk” properties, in effect, is an addendum to the above future-proofing. Brought about either as a penalty imposed by the inner Obasanjo circle for the disgrace SEO caused to its core members, i.e. telling SEO to use his influence and power to placate MEND and friends or lose his money (one is reminded of the mysterious Oliphant post re SEO forced to “walk the plank”). Or, alternatively, it is a subtle message sent to Nuhu Ribadu and his EFCC by SEO himself to get off his back, as he fights the fight of the federal government in trying to weed out the plundering in his small oil corner of the south and its coast line.

Either way, he is paying the wages of sin. The end of the fully carried, relatively worry free ERHC as a hitherto autonomous and independent entity, with himself as its near-omnipotent ruler.

But certainly not the end of ERHC, if he can manage to fend off the challenges now before it. For in addition to his divesture of majority control and the additional obligation to quickly placate extremely high risk but appealing oil properties, there are other ordeals he still has to face, ones possibly even more sinister.

These threats come from the changing political landscape of Nigeria. More precisely, from the emergence of Islam as a pillar of its post-tribalistic and fragmented federal body politic, in a way it has never been before.

All three leading candidates for the Presidency in the forthcoming elections are Muslims, with the austere and reclusive Governor Umaru Musa Yar’Adua, the Mr. Clean of Nigerian politics and nominee of the powerful ruling party, himself being something of an Islamist. (He imposed Sharia as the operative law in his northern home state of Katsina, a situation that caused immense international uproar when a young mother, Amina Lawal, was sentenced to death by stoning as per Sharia penal precepts). Furthermore, one should also remember that the head of MEND, is a Christian convert to Islam, one who openly declares his sympathy to and with Osama bin Laden and his ilk.

This is not to say the Nigeria is about to transition itself full scale into an “abode of Islam”. But the country’s political identity is certainly shifting towards accommodating a more favourable status for (Sunni) Muslim ideology and governance.

SEO, a stanch Catholic, is certainly attuned to these shifts and what they possibly portend for the totality his oil business interests, both upstream related (ERHC) and downstream (Chrome). And it is not encouraging.

He thus faces a brick wall. A weakened personal power disposition, politically induced business upheavals brought on by former close allies and looming threats from the evolution of Islamic components in Nigerian polity and society.
But it is here, I would argue, that SEO’s entrepreneurial fecundity and flair serve him well in the search for ways around, under or over the brick wall in front of him. An unconventional quest leading him to chose to work with Arab investors (Dubai, other Gulf investors and the Saudis), Muslims to a man, through the intermediary of MPE oil funds, Sharia compliant ones, as is strongly pointed out in their web site.

For it is investors of this background, who can offer SEO and his companies the greatest amount of protection in the days to come, be that from less than lukewarm Nigerian political support for ERHC, from MEND predators in “low-risk” Niger Delta oil properties or at attacks at Chrome facilities in Port Harcourt. All would respect not just SEO, but his Muslims associates as well. For having Allah on your side, certainly neutralizes probable adversaries, may even turn them into possible allies. To say the least.

For SEO then, the benefits are obvious. And he can leverage the selling price of his upstream and downstream interests in tandem. For one cannot be had without the other.

Why would Gulf and Saudi investors, which may include, inter alia, Saudi Aramco, by far the largest oil company in the world (and as such sanctioned by its majority owners, the Saudi royal family….. a crucial first step in any major Middle East business decision) be at all interested?

The benefits are two-fold:

First, there is the little matter of finding possible elephantine amounts of oil in the JDZ blocks where ERHC is perched with free carries. While this opportunity may be intrinsically important to wealthy individual or institutional Gulf investors, it matters little to the likes of Saudi Aramco. For that company is not known to support upstream projects outside of Saudi Arabia. Its vast overseas holdings are almost exclusively in refinery, storage and related downstream activities. So while the ERHC assets per se, are of little interest, it very likely that the Chrome Oil service businesses… and SEO facilitations thereof, is appealing.

Establishing a forward refining, storage and support base, say on the recently purchased large Chrome acreage in Port Harcourt, would greatly facilitate the shipment and delivery of Aramco owned crude just across the pond to America. Furthermore, a presence in Nigeria would permit sourcing for oil locally. Thus minimalizing the time, transport and security costs involved as compared to sending it from the Arabian Gulf and through that increasingly volatile (and Iranian controlled) choke-point, the Straits of Hormuz. Indeed, this is logistically akin to the huge Saudi Aramco reserves depot in Rotterdam that supplies Arabian crude to much of Europe, or the similar project currently underway outside of Shanghai (?) to perform the same for Chinese consumption. And the Arabs would be assured of a welcome for their Nigerian investment, unlike the hostility Dubai World (a founder of MPE) experienced in the USA last year in attempting to enter port management business there…..

The second benefit is purely political and ideological. And very compelling it is. For it has to do with the fact that in a post-Obasanjo Nigeria, Islam is slated for a certain restrained ascendancy in public life. There is no need to labour the point. Such ascendancy is motivation enough for the Gulf sheikhs and especially the Saudi political elite, given they are duty bound to support such Islamic pretensions. The more so, as it promises to occur in a relatively pro-Western African country, one with open market policy in resource development. Still.

This then is precisely what the Ledbetter appointment represents. A precursor of a major infusion of Arab money , above all Saudi money, into the Nigerian/West African oil patch through investments primarily in SEO’s oil businesses. It is the Arabic sanction signal equivalent of what would be called in the West a seal of good housekeeping. And he’s here to mind the store.

All this suits SEO just fine. Given the realities on the ground (as outlined above), I think ERHC PIs such as myself can also rest easy. Here’s why:
One must be careful not to take too ERHC-centric a view of recent developments. The company itself is part of SEO’s un-integrated, unconsolidated and loose oil grouping. But there are other such disparte groups in Nigeria, even in the JDZ as well, especially prevalent in the upstream sector. Both foreign owned and indigenous. Moreover, Arab investors (Saudi Aramco included) are not all interested in the same assets.

These same investors are/have been put together under the mantle of the MPE Oil Fund. Rather, MPE is sanctioned to proceed with the transactions involved, to be the amongst other things, the intermediary and vehicle for the flow of Arab oil money to West Africa/Nigeria, primarily through the SEO entities.

So MPE must begin a consolidation process, one that would appeal to its variegated internal investment interests. This is what an M&A practice is all about, and Walter Grandhuber (former ERHC CEO, oil sector M&A specialist and MPE principal) is the man to carry it out. One cannot know or need to know the details. It is the big picture that is important, and at this point an outsider can only vaguely see what the outlines could be.

The consolidation would start perhaps with trying to tie together SEO’s main upstream interest with other similar E&P holdings… EEL first comes to mind, with stakes in JDZ/Blk 2 and the STP EEZ, as does the old 10% Centurion holding in JDZ/Block 4, now held by another Gulf Arab (UAE) entity, Dana Gas, certainly also, Mohamed Asibelua’s (the STP President’s investment advisor) Amber Petroleum 5% holding in Block 2 and 10% in Block 3. Ditto for available downstream sector entities.

Such consolidation would create oil entities of a size and scale which Arab investors are familiar with….something in the potential order of at least 10-11 billion barrels recoverable reserves in the case of an EEL/ERHC merger alone. Same process for possible huge refinery/storage capacities in the downstream area. So in the end, MPE would have a number of possible investment proposals to leverage for finance under the aegis of entire West African project. Contingent of course, on the success of its negotiations with the selling parties.

Ultimately these sellers will decide which way the wind is blowing for MPE. Within limits of course, imposed for example, on EEL by its need for sufficient development funds, or on ERHC by the mandatory order to restrain hubris. Meanwhile EEL has other suitors, the smaller Dubai group (Al Thani ) who is interested in a full buy-out, possibly the ONGC-SNP JV, for partial buy-in or an alliance of sorts in the JDZ and the EEZ. ERHC’s SEO can-and probably is-leveraging price of an ERHC buy-in with that of a buy-in into Chrome Oil. And I highly doubt he plans on short changing himself with either, ….making my $2 ERHC pps reckoning in Part 1, appear to be a wee bit on the low-end….

Its not as if the Arab petrodollar backed MPE cannot afford the asking prices. On the contrary. For this Middle East foray into Nigeria and the JDZ/EEZ ties in with the relative falling out of favour of smaller oil companies in Western finance and investment circles, in the wake of the collapse last year (mid 2006) of a number of hedge funds who were overcommitted to such oilers, as EEL longs know all too well.

It is no longer “de rigueur” to maintain small and mid-sized oil stocks in Western investment portfolios, as even a cursory analysis of energy stock performances on AIM reveals. In their place however comes new money from Eastern Europe/Russia, from Asia (China) and increasingly Middle East petrodollars now being recycled into long term investments…not squandered as before in the late 70’s and 80’s.

So this is the big picture. The Chinese and the Indians are moving into the Gulf of Guinea big time through a possible JV, as they (especially the Chinese) have already done in most of the rest of sub-Saharan East and West Africa. And now Middle East/Arab investors are following, using MPE as the penetration vehicle and SEO’s ERHC and Chrome Oil assets as the spring board. Just follow the money.
It is not even inconceivable that the ONGC/SNP JV could partner with an (upstream) Newco the MPE Fund shall create to properly manage and exploit its holdings, particularly to jointly develop the huge concessions in the STP/EEZ, given the peculiar ambiguities and development problems it still faces. But should this come to pass, practically the entire mid GoG will be controlled by these truly well funded and amazingly well-connected new oil concerns.

To the delight of their shareholders, and seemingly to the chagrin of what appear to be inactive Western super majors. The money word here is “seemingly”.

For if not the Chinese-Indian JV, most certainly the MPE newco, when it ascertains proven reserves, will be offered for sale to them, many times the buying price. A mouth watering prospect to the pro-western investor sheikhs and an even further delight for those very patient ERHC (and EEL) PIs. An event the Chevrons and Totals and Exxons of this world are only too happy to await.

Exactly where we are in this early continuum of unfolding core events is still shrouded in mystery. Only a handful of people know what is actually taking place and they certainly aren't talking. Nor will they. Discretion is the motto of merchant bankers, and that is what MPE really is, for it is the one pulling (or trying to pull) all the threads together and make a good sale….in the fullness of time.

We have only some recent whispering about what is going on, like rumblings before a quake, ones growing in intensity. But when an announcement hits the fan, it will do so with a bang, a big bang, the biggest ever heard in that part of the oil world.

Elementary my dear Watson……Huh!