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Cablegate: Exxon and Chrome First to Bid On Jdz Blocks

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 LAGOS 000075

SIPDIS

STATE PASS TO EXIM AND TDA

E.O. 12958: N/A
TAGS: EPET EINV PGOV PINR PREL NI
SUBJECT: EXXON AND CHROME FIRST TO BID ON JDZ BLOCKS

SENSITIVE BUT UNCLASSIFIED, PLEASE TREAT ACCORDINGLY.

1. (U) SUMMARY. The development of natural resources in
the Nigeria-Sao Tome and Principe Joint Development Zone
(JDZ) took another step forward after a joint regulatory
body gave ExxonMobil the go-ahead to exercise preferential
rights in the Zone. An American-Nigerian company will have a
similar opportunity after ExxonMobil, followed by winners of
the twenty companies that tendered non-preferential bids in
October 2003. The Joint Development Authority operating in
Abuja is preparing for the robust development of petroleum
and other natural resources in the JDZ, and diversification
into other commercial enterprises. END SUMMARY.

2. (U) On December 30, the fifth Nigeria-Sao Tome Joint
Ministerial Council meeting announced that exploitation of
the Joint Development Zone may begin in the foreseeable
future as the Council agreed to give ExxonMobil the
opportunity to exercise its preferential rights to bid on
specific blocks in the JDZ. ExxonMobil has thirty days to
submit its bids, after which Environmental Remediation
Holding Corporation (ERHC), a Houston-based firm now doing
business as Chrome Energy Corporation (CEC), will exercise
its preferential rights.

-------------------
CHARTING THE COURSE
-------------------

3. (U) Work on the JDZ began in 1999 when the heads of
state of Nigeria and of Sao Tome and Principe agreed to
negotiate a formal treaty regulating the development of a
zone of overlapping maritime boundary claims between the two
countries. Negotiations began in 2000, and a treaty was
signed and ratified by both countries in 2001 covering a
Joint Development Zone of almost 35,000 square kilometers.
The treaty will be in force for 45 years with a review after
30, and Nigeria and Sao Tome and Principe will share
resources on the basis of a 60/40 ratio, respectively.

4. (U) Disagreements between the countries over elements
of the treaty stalled further development of the JDZ until
the Nigeria-Sao Tome and Principe Joint Development
Authority (JDA) announced the opening of the 2003 JDZ
Licensing Round in April 2003. Nine blocks were offered,
and bids were due by October 18. A summary of signature
bonuses offered in the bids (see below) was issued on
October 27.

5. (SBU) Sam Dimka, head of Corporate and Public Affairs
for the JDA, told Econoff that twenty companies submitted 33
bids for eight of the nine blocks offered. Most were for
the northern-most blocks which are generally considered to
hold the most promise; no bids were received for Block 08,
one was received for Block 09, and the single bid for Block
07 did not conform to bid requirements set forth in the
published Guidelines for Investors, according to Dimka.

--------------------------
THE COST OF DOING BUSINESS
--------------------------

6. (SBU) Winning bidders will be offered production
sharing contracts (PSC) by the JDA. (A PSC is a contract
whereby one party, usually an international oil company,
takes all of the risks and bears all the cost of finding and
producing petroleum. After recouping such costs, the
contractor shares production with a national oil company.)
The JDA will evaluate bids first according to specified
technical criteria and then commercial criteria. A key
element of the commercial evaluation will be the signature
bonus offered by the bidders. The signature bonus is a
premium each bidder agrees to pay in a lump sum within 30
days of signing a PSC with the JDA. The Guidelines for
Investors stipulated that a signature bonus of at least $30
million was required per block. (The JDA's Dimka told
Econoff that the bid for Block 07 included a signature bonus
of less than $30 million so the bid was deemed non-
compliant.) ChevronTexaco reportedly offered $123 million
for Block 01. Dimka estimated that Sao Tome and Principe
alone will receive between $100 million and $200 million by
mid-2004 from the signature bonuses. Bidders are also to
offer production bonuses for specific future production
thresholds.

7. (U) In addition to the bonuses, each bidder was
required to pay a $15,000 application fee per block, as well
as a $10,000 bid processing fee per block. Companies had
the opportunity to purchase data and non-exclusive seismic
surveys on the blocks at commercial rates from firms
including PGS, WesternGeco and Veritas.

-------------------
PREFERENTIAL RIGHTS
-------------------

8. (U) Third Party Interests must be settled before the
JDA offers contracts on the bids. ExxonMobil and
Environmental Remediation Holding Company, now operating as
Chrome Energy within the Chrome Group of Nigeria, had been
conducting exploration activities under agreement with the
Democratic Republic of Sao Tome and Principe (DRSTP) prior
to negotiation of the JDZ treaty. Both companies were
subsequently given preferential bidding rights under the
treaty.

9. (U) ExxonMobil has first opportunity to bid on three
blocks, and may hold stakes as high as 40 percent, 25
percent, and 25 percent respectively in the blocks. The
company has 30 days after it was notified by the JDA to
exercise its rights (until about January 30, 2004).
Subsequently, Chrome Energy will be given 15 days to
exercise its rights to six blocks. The maximum stake Chrome
may own in its blocks varies from 15 to 30 percent. Chrome
may bid on blocks already bid by ExxonMobil, but the two
companies cannot hold a combined interest greater than 40
percent in any one block.

10. (U) Dimka told Econoff that these preferential bids
must also include a signature bonus at least equal to the
proportion of its preferential right in a block when
compared to the highest bid for that block in the 2003
licensing round. For example, if ExxonMobil submits it's
first preferential bid on a block for which ChevronTexaco
submitted the highest signature bonus, ExxonMobil's
signature bonus must match at least 40 percent of
ChevronTexaco's offer.

----------------------------
LOOKING FOR FAST DEVELOPMENT
----------------------------

11. (SBU) Representatives of the two countries and the JDA
have publicly stated that the amount of the signature bonus
will not be the sole determinant of a winning bid.
Considerations such as experience, financing, and commitment
to local content will be closely evaluated. The JDA's Dimka
told Econoff that the Authority will choose companies that
show a capacity and intent to develop and produce oil in the
Zone quickly and efficiently. The JDA, he said, is
concerned that some bidders, particularly smaller companies
indigenous to West Africa, have submitted bids in hopes of
gaining rights they do not plan to develop but instead would
transfer later at hefty fees. Dimka said the JDA is not
interested in licensing such "land grabs."

----------------
MULTIFACETED JDA
----------------

12. (SBU) Dimka also told Econoff that the JDA is set up as
a "one-stop resource" shop for the companies that will
ultimately develop the JDZ, as it is both the exploratory
body offering licenses and the regulatory agency
implementing the Zone's Petroleum Regulations and collecting
taxes, royalties and fees. Dimka said knowledgeable and
talented individuals from both countries staff the JDA. He
noted the JDA's Chairman, Dr. Taju Umar, holds a PhD in
Geology and was formerly associated with Nigeria's
Department of Petroleum Resources. Dimka himself worked in
the public affairs office of Nigeria's former Advisor to the
President for Petroleum Matters, Dr. Rilwanu Lukman,
including while Lukman served as Secretary General of OPEC.

13. (SBU) According to Dimka, the JDA will be financially
self-sufficient, and will develop and manage resources in
the Zone other than oil, such as fishing and non-petroleum
minerals. Dimka said the JDA will invest in other
commercial interests, such as service industries and
airlines. Dimka also said the JDA is committed to ensuring
the security of operators and facilities that will be
established in the Zone, and will coordinate that effort
between the two countries and private security firms.

------------------------------
BOON FOR SAO TOME AND PRINCIPE
------------------------------

14. (SBU) Dimka told Econoff that while this venture will
benefit both countries, the potential windfall it may create
for the Democratic Republic of Sao Tome and Principe (DRSTP)
is enormous. He did note that the DRSTP must develop its
infrastructure and commercial centers significantly in the
near future to handle the influx of business the JDZ will
bring. For example, he said recent meetings held in DRSTP
used all available hotel space, and that several new large
hotels are needed. He also noted that international oil
companies and Nigerian banks are interested in negotiating
land purchases now with the expectation that they will
establish future operations on the islands.

HINSON-JONES

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