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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 000082

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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